A month has gone by since the last earnings report for Watsco (WSO Quick QuoteWSO - Free Report) . Shares have added about 3.9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Watsco due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Watsco Q4 Earnings & Revenues Miss, Margins Down Y/Y

Watsco reported dismal fourth-quarter 2023 results, with earnings and revenues missing the Zacks Consensus Estimate. On a year-over-year basis, the top line grew while the bottom line dwindled.

The quarter’s results reflect a seasonal sales trend, wherein HVAC equipment witnessed flat sales while sales in other HVAC products declined, year over year. Also, sales volume for commercial refrigeration products was down. Furthermore, high costs and expenses impacted the bottom line of the company.

Nonetheless, the company’s focus on improving its operating efficiency, conforming inventory levels to current conditions and generating cash flow are encouraging through 2024.

Inside the Numbers

Watsco reported quarterly earnings of $2.06 per share, lagging the Zacks Consensus Estimate of $2.50 by 17.6%. In the year-ago quarter, the company reported adjusted earnings per share of $2.35.

Revenues of $1.6 billion missed the consensus mark of $1.64 billion by 2.2% but increased 1.4% year over year.

Sales of HVAC equipment (heating, ventilating and air conditioning, comprising 69% of sales) were flat year over year. Sales of other HVAC products (27% of sales) dropped 6% from the year-ago quarter. Sales from commercial refrigeration products (4% of sales) declined 3% year over year.

Operating Highlights

The gross margin contracted 160 basis points (bps) in the fourth quarter to 25.8%. Our model predicted the gross margin to contract 10 bps year over year. SG&A expenses, as a percentage of sales, increased 40 bps year over year to 19.5% in the quarter, much ahead of our expectation of a decline of 110 bps year over year.

The operating margin declined 200 bps year over year in the fourth quarter to 6.7%. Our estimate for the metric was 9.8%.

2023 at a Glance

Total revenues inched up 0.1% to $7.28 billion compared with $7.27 billion reported in the year-ago period. During 2023, Watsco’s earnings were $13.67 per share, down from the 2022 reported adjusted figure of $14.20.

The company’s gross margin contracted 50 bps year over year to 27.4%. Also, the operating margin of 10.9% declined 50 bps compared with the prior year value of 11.4%.

Financial Operations

As of Dec 31, 2023, Watsco’s cash and cash equivalents were $210.1 million compared with $147.5 million in 2022 end. For 2023, the net cash provided by operating activities was $562 million compared with $572 million in the prior year period.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

The consensus estimate has shifted -20.37% due to these changes.

VGM Scores

Currently, Watsco has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Watsco has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.