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Shares of  Watsco Inc. (WSO - Analyst Report) have gained 5% and closed at $104.18, after reporting first-quarter 2014 results on Apr 17. Earnings per share increased 23% year over year to a record 48 cents from 39 cents in the year-ago quarter. The reported figure also beat the Zacks Consensus Estimate by a penny. The growth was aided by higher sales, stronger selling margins and improved operating efficiencies.

Total revenue increased 7% year over year to a record $763 million and surpassed the Zacks Consensus Estimate of $761 million. Residential air conditioning and heating (HVAC) equipment sales rose 13% and other HVAC product sales were up 8%.

Cost and Margins

Cost of sales increased 6.7% year over year to $574.5 million. Gross profit grew 7% year over year to $188 million. Gross profit margin increased 10 basis points (bps) to 24.7% from 24.6% in the year-ago quarter. Selling, general and administrative expenses rose 5% year over year to $152.5 million. Income from operations increased 16% year over year to a record $35.6 million. Operating margin increased 40 bps to 4.7%.

Financial Operations

Cash and cash equivalents remained flat at $19.5 million as of Mar 31, 2014, compared with Dec 31, 2013. Cash flow from operating activities was $24.9 million in the reported quarter, compared with cash usage of $17.5 million in the prior-year quarter. The company’s debt-to-total-capital ratio was 17% as of Mar 31, 2014, flat as compared with Dec 31, 2013. Watsco also announced a 50% increase in annual dividend to $2.40 per share.

Our Take

Watsco has immense potential in the replacement market, given an aging stock of air conditioners and heating systems in the U.S. Watsco’s joint venture (JV) with Carrier Corporation, a wholly owned subsidiary of United Technologies Corp. (UTX - Analyst Report), continues to generate profits. The company intends to purchase an additional 10% interest in the JV in the Sun Belt region in 2014. This is likely to be accretive to earnings.

Watsco currently has a Zacks Rank #2 (Buy). Some better-ranked stocks in the same sector include Nortek Inc. (NTK) and Arrow Electronics, Inc. (ARW - Analyst Report). Both of these have the same Zacks Rank as Watsco.

Read the Full Research Report on WSO
Read the Full Research Report on ARW
Read the Full Research Report on UTX
Read the Full Research Report on NTK

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