We have recently downgraded our recommendation from Outperform
to Neutral on
), the largest distributor of air conditioning, heating, and
refrigeration equipment as well as related parts and supplies in
the United States. Shares of Watsco currently retain a Zacks #4
Rank (short-term Sell rating).
Watsco reported second quarter earnings per share of $1.15, up
6% year over year and revenues of $1.01 billion, which increased
15% year over year. However, both fell short of the respective
Zacks Consensus Estimates
We believe Watsco has immense potential in the replacement
market of air conditioners and heating systems in the U.S as old
units would get replaced by more energy-efficient units in the
coming years. There are approximately 89 million central air
conditioning and heating systems installed in the United States
that have been in service for more than 10 years.
Among these, the older systems are operating below the
government-mandated energy efficiency and environmental standards.
Watsco is positioned to benefit from enhanced equipment replacement
cycle. Moreover, higher efficiency units drive higher pricing and
higher margins for the company.
The Architecture Billing Index of American Institute of
Architects became positive in August after remaining in the
negative territory for four consecutive months since April. The
index increased 1.5 points from July to 50.2 in August, 2012. Any
reading above 50 indicates an increase in demand for architect's
The new projects inquiry index was 57.2 in August, up from 56.3
in July. We believe that the housing market is improving, though at
a moderate pace, thanks to an increase in employment rates, higher
consumer confidence and several years of pent-up demand. Watsco
will experience an uptick in activity as the recovery continues to
Watsco recently announced a special cash dividend of $5.00 per
share based on the current annual dividend rate of $2.48, which is
equivalent to approximately two years of dividends. The special
dividend will amount to a total payout of around $172 million.
Watsco paid $41 million in dividends in the first half of 2012.
Earlier this year, Watsco's board of directors approved a 9%
increase in its quarterly dividend to 62 cents per share. Watsco
has consistently paid dividends for over 35 years and has increased
its dividend over the last 11 consecutive years. Cash and cash
equivalents were $35.2 million as of June 30, 2012, compared with
$18.1 million as of March 31, 2012. With
debt-to-total-capitalization ratio at 16%, the company has
substantial flexibility to make additional investments and pay
dividends going forward.
Watsco lowered its 2012 guidance to $3.15-$3.25 from $3.25-$3.40
to incorporate lower-than-expected earnings from the joint venture
with Carrier in Canada. This business is experiencing some profit
issues and Watsco is currently in negotiation with Carrier to
rectify this. We expect these issues to impact profitability in the
second half of fiscal 2012.
Watsco's business is subject to federal, state and local laws
and regulations relating to the storage, handling, transportation
and release of hazardous materials into the environment. These laws
and regulations include the Clean Air Act, relating to minimum
energy efficiency standards of HVAC systems and the production,
servicing and disposal of certain ozone-depleting refrigerants used
in such systems.
HVAC units use R-22, a refrigerant that has been identified as a
contributor to ozone depletion. The EPA has mandated that all HVAC
manufacturers cease production of R-22 refrigerant starting
January, 2010 and then cease entirely by January 1, 2020. R-22 will
be replaced with an environment-friendly and more efficient R 410A
refrigerant, which will lead to incremental costs.
Watsco distributes residential and commercial air conditioners;
parts such as replacement compressors, evaporator coils and motors;
as well as supplies such as thermostats, insulation materials,
refrigerants, grills, registers, sheet metal, tools, concrete pads,
tape, and adhesives. Watsco distributes products through 542
locations to over 50,000 customers in 38 states, Puerto Rico, Latin
America and the Caribbean.
WATSCO INC (WSO): Free Stock Analysis Report
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