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Watsco (WSO) Down 1.4% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Watsco (WSO - Free Report) . Shares have lost about 1.4% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Watsco due for a breakout? 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’s (WSO - Free Report) Q1 Earnings Meet Estimates, Revenues Miss

Watsco, Inc. reported first-quarter 2019 results, wherein earnings met the Zacks Consensus Estimate, while revenues missed the same. The company reported quarterly earnings of 88 cents per share, in line with the consensus estimate. However, total revenues of $931.3 million lagged the consensus mark of $944 million by 1.4%.

On a year-over-year basis, the company’s top line grew 1% but bottom line declined 1.1%. Watsco has been experiencing unfavorable weather in certain markets served. The company’s first quarter, which has one less selling-day than the corresponding period of 2018, is the weakest period of the year on a seasonal basis.

Product Line Sales Discussion

Sales of HVAC equipment (heating, ventilating and air conditioning; accounting for 67% of sales) increased 2%. However, sales in other HVAC products (29% of sales) and commercial refrigeration products (4% of sales) declined 2% and 4%, respectively, from the prior-year quarter.

Operating Highlights

Cost of sales grew 0.3% to $697.5 million from the year-ago quarter. Gross margin improved 20 basis points (bps) to 25.1%.

Selling, general & administrative expenses (SG&A) increased 1% from the year-ago quarter to $180.1 million. On a same-store basis, the metric remained flat year over year. However, SG&A expenses, as a percentage of sales, improved 10 bps to 19.2%.

Operating income increased 2% from the prior-year period to $55.1 million during the quarter. Operating margin also improved 10 bps year over year to 5.9%. On a same-store basis, operating income rose 4%, while operating margin expanded 30 bps to a record of 6.1%.

Financial Operations

As of Mar 31, 2019, cash and cash equivalents were $77.3 million compared with $82.9 million at 2018-end. Cash from operations was $52.9 million in the first quarter compared with $41.6 million a year ago.

At the end of the first quarter, Watsco’s debt-to-total capitalization ratio was 8%.

Strategic Highlights

On Apr 4, 2019, the company announced the completion of the acquisition of a distributor of air conditioning and heating products, DASCO Supply. Based in Whippany, NJ, DASCO will provide its resources and technology in order to aid Watsco in accomplishing growth plans.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, Watsco has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, 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 trending upward for the stock, and the magnitude of this revision looks promising. Notably, Watsco has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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