Watsco’s Poor Show in Q2

Watsco Inc. (WSO - Analyst Report) recently reported its second quarter results. The company reported net income of $0.61 per share, in line with our expectations, but 35% lower compared to last year. The decline in earnings was primarily due to lower revenue led by a weak housing market.

The company’s total revenue was down 20.6% driven by weak demand due to economic conditions, decline in new housing, and a late start to the cooling season. Sales in the quarter were also impacted by lower pricing for certain products that are sensitive to changes in commodity prices.

Second quarter’s revenue reflects a 15% decline in sales of air conditioning and heating (HVAC) equipment, a 28% decline in sales of other HVAC products and a 15% decline in sales of refrigeration products.

The rapid decline in housing starts is being a drag on overall unit demand. We expect the housing market to remain challenging for the next couple of quarters. Thus, the company depends more on the replacement market for its top-line growth.

It is estimated that approximately 80% of the U.S. industry sales are tied to the replacement market and are expected to increase as more energy-efficient units replace old units over the next decade. However, we believe that the replacement market cannot fully offset the rapid deterioration in the new home market over the near-term.

The company recently completed its previously announced joint-venture, named Carrier Enterprises LLC, with Carrier Corporation. This deal fits with the company’s strategy of increasing its market share through acquisitions and by boosting its product offering.

The joint-venture with Carrier not only adds significant new product groups to the company's sales mix, but also marks Watsco's entry into international markets with the addition of the Latin American and Caribbean sales operations of Carrier Enterprises.