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On Jul 16, Zacks Investment Research upgraded Watsco Inc. (WSO - Analyst Report), distributor of air conditioning, heating, and refrigeration equipment as well as related parts, to a Zacks Rank #1 (Strong Buy). The company is scheduled to report its second quarter results on Jul 18.

Why the Upgrade?

Watsco is expected to report an earnings beat in the upcoming quarter, following an 18.18% earnings surprise in the previous quarter.

On the domestic front, the company continues to witness growth in the residential product segment and the momentum is expected to continue in 2013 as well, aided by the recovery in the housing market. The company will also benefit from demand in the replacement market for air conditioners and heating systems in the U.S due to an aging stock.

Watsco’s joint venture with Carrier Corporation, a wholly-owned subsidiary of United Technologies Corp. (UTX - Analyst Report), remains successful and continues to generate profits.  Watsco has an option to purchase an additional 10% interest in the Carrier joint venture in the Sun Belt region, which becomes exercisable in Jul 2014. This option, if exercised, is expected to be accretive to Watsco’s earnings.

For 2013, Watsco expects to generate earnings per share in the range of $3.60 to $3.75. This projects an annual growth rate of 19% to 24%,. Watsco expects to meet or exceed its annual target of generating greater cash flow than net income in 2013. Watsco plans to reduce its debt and evaluate the option of an increased dividend before the end of 2013.

In the past 7 days, the Zacks Consensus Estimate for Watsco has gone up 0.5% to $3.72, reflecting a 22.22% year-over-year increase. The Zacks Consensus Estimate for 2014 edged up 0.7% to $4.38.

Other Stocks to Consider   

Other stocks in the industry that are performing well and deserve a mention include Comfort Systems USA Inc. (FIX - Snapshot Report), carrying a Zacks Rank #1 (Strong Buy), and Eagle Materials Inc. (EXP - Snapshot Report) with a Zacks Rank #2 (Buy).

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