On Aug 8, 2014, we issued an updated research report on
), a leading distributor of air conditioning, heating, and
refrigeration equipment as well as related parts and supplies
(HVAC/R) in the United States.
Watsco's second-quarter 2014 adjusted earnings increased 8% year
over year to $1.60 per share aided by robust unit growth, a
stronger sales mix of high efficiency HVAC equipment, improved
selling margins and operating efficiencies. Total revenue increased
4% year over year to a record $1.17 billion.
The market for residential central air conditioning, heating and
refrigeration equipment and related parts and supplies in the
Americas is worth approximately $35 billion. Watsco now owns 10% of
the market and has immense potential to increase its market share
as no other competitor can match Watsco's geographic footprint.
Watsco will continue to benefit from demand in the replacement
market as old units 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. Moreover, higher
efficiency units mean higher pricing and higher margins for the
Watsco's joint venture with Carrier Corporation, a wholly owned
subsidiary of United Technologies Corp. (UTX), has been successful
and continues to generate profits. In Jul 1, 2014, Watsco exercised
its second option to acquire an additional 10% ownership interest
in Carrier Enterprise I in the Sun Belt region. Watsco now holds an
80% controlling interest in Carrier Enterprise I. In the U.S., the
most significant markets for HVAC products are in the Sun Belt.
This increased stake will be accretive to Watsco's earnings by 20
cents to 25 cents over the next 12 months.
Watsco has made several investments over the past one year to
increase its market share - it added 200 people in sales,
marketing, product specialist, and store personnel roles; eight
locations have been opened in the past year with 20 more expected
to open in the next 12 months. The branches will improve network
density as well as the ability to service customers locally. Watsco
maintains its long-term plans to increase revenues to above $10
billion and margins above 10%.
International sales (which contribute 12% of total sales) were
flat in the first quarter and declined 4% in the second quarter due
to foreign exchange losses in Canada and challenges in its Latin
America/Mexico/Caribbean regions. Watsco issued its 2014 earnings
per share guidance at $4.20-$4.40 - the lower-than-expected
forecast reflects weaker international markets and non-HVAC
equipment sales, as well as incremental internal investments.
Moreover, Watsco has been historically acquisitive. The
company's strategy mainly centers around geographic expansion of
its HVAC business through new market acquisitions, subsequently
increasing revenues and profits from a combination of greater
number of locations, products, services, and improved management
practices. However, the company has been lately inactive on the
Other Stocks to Consider
Watsco currently carries a Zacks Rank #4 (Sell). Some
better-ranked stocks in the sector include Garmin Ltd. (
), Research Frontiers Inc. (
) and Universal Electronics Inc. (
). All of these stocks hold a Zacks Rank #2 (Buy)
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