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What's in the Cards for Watsco (WSO) This Earnings Season?

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Watsco, Inc. (WSO - Free Report) is slated to report fourth-quarter 2018 results on Feb 14, before the opening bell.

This largest distributor of heating, ventilation and air conditioning equipment as well as related parts and supplies (HVAC/R) reported higher earnings and revenues in the last reported quarter. The company’s top and bottom lines increased 5% and 16%, respectively, on a year-over-year basis. The improved results stemmed from higher unit demand in HVAC equipment, as well as better pricing and sales mix.

However, its earnings and revenues missed the Zacks Consensus Estimate by 6.2% and 1.2%, respectively, in the said quarter. In fact, Watsco missed the consensus mark in four of the trailing five quarters, with the average negative surprise being 5%.

Watsco, Inc. Price and EPS Surprise

Let’s See How Things are Shaping Up for This Announcement

Continued investment in technology, robust unit demand, along with improved equipment pricing and sales mix are helping Watsco to post better results over the last few quarters. The trend is likely to continue in the to-be-reported quarter as well.

Watsco has been investing in technologies in order to satisfy customers’ expectation regarding speed, productivity and efficiency, as well as enhance their experience through e-commerce. Notably, its e-commerce sales added more than 30% to third-quarter total sales, given the use of various technology platforms. Notably, the quarter registered the highest sales and profits in the company’s history. It remains positive on technology enhancement to contribute to sales growth in the to-be-reported quarter.

Meanwhile, in October 2018, Watsco acquired Alert Labs, a technology company in Canada, which will help it to grow its customer base and profitability. The buyout will enable the company to leverage technology investment, enhance productivity and reduce costs.

Watsco has a huge growth potential in the replacement and heating equipment market. In fact, demand for heating equipment was at its peak during the fourth quarter. In the last reported quarter, sales of HVAC equipment (which comprises 68% of total sales) increased 7%, driven by 6% rise in residential HVAC equipment, 9% growth in commercial HVAC equipment along with 4% increase in sales of other HVAC products (28% of total sales)

Notably, the Zacks Consensus Estimate for revenues is pegged at $1.01 billion, reflecting a gain of 4.8% from $964.4 million recorded in the year-ago quarter.

However, its digitization of business substantially increased selling, general and administrative expenses or SG&A over the past three years. In fact, SG&A, as a percentage of net sales, grew 60 basis points from the prior-year period in the third quarter of 2018. These incremental annual costs of SG&A investments are anticipated to reach approximately $25 million in the quarter to be reported.

Meanwhile, the consensus estimate for the quarter to be reported is pegged at $1.06 per share, remaining stable over the past 60 days, which reflects 17.8% year-over-year growth.

What Our Model Indicates

Our proven model does not show that Watsco is likely to beat earnings estimates in the to-be-reported quarter. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You can see the complete list of today’s Zacks #1 Rank stocks here.

Watsco currently has a Zacks Rank #4 (Sell) and an Earnings ESP of 0.00%, making surprise prediction difficult. You may uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Meanwhile, we caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks Worth a Look

Here are a few construction stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat in the upcoming release:

Forterra, Inc. (FRTA - Free Report) has an Earnings ESP of +8.99% and a Zacks Rank #2.

Toll Brothers Inc. (TOL - Free Report) has an Earnings ESP of +1.91% and holds a Zacks Rank #3.

Owens Corning (OC - Free Report) has an Earnings ESP of +5.83% and a Zacks Rank #3.

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