Watsco's EPS Meets, Sales Top - Analyst Blog

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Watsco Inc. 's ( WSO ) first-quarter 2012 adjusted earnings were 24 cents per share, in line with the Zacks Consensus Estimate and above the year-ago quarter earnings of 21 cents.

As reported by the company, earnings were 23 cents per share compared with the year-ago quarter's earnings of 21 cents.

Total revenue increased 19% to $634 million, comfortably surpassing the Zacks Consensus Estimate of $581 million. Same store sales increased 7%, including a hike of 12% in air conditioning and heating (HVAC) equipment and an 11% rise in commercial refrigeration products, while sales of other HVAC products dropped 1%.

Cost and Margins

Cost of sales increased 21% to $483 million in the quarter. Gross profit was up 12% to $151 million. However, gross profit margin dropped 150 basis-points (bps) to 23.8%.

On a same store basis, gross profit inflated 1% while gross margin decreased 140 bps to 23.9%. Gross margin plummeted due to higher sales mix of HVAC products generating lower margins than non-equipment products and timing of inventory purchases.

Selling, general and administrative expenses rose 11% to $131 million in the quarter. Income from operations increased 19.1% to $19.9 million. Operating margin remained flat year over year at 3.2%.

Financial Operations

Cash and cash equivalents were $18.1 million as of March 31, 2012, compared with $15.7 million as of December 31, 2011. Operating cash flow was $9 million in the quarter.

Borrowings of the company were $42.5 million as of March 31, 2012, compared with $20 million as of December 31, 2011. Board of Directors of Watsco approved a 9% increase in the quarterly dividend to 62 cents per share. It marked the 11 th consecutive year of steady dividend increase.

Outlook

The company expects earnings in the band of $3.25-$3.40 per share for 2012. This represents a growth rate of between 19% and 24% over 2011. The current Zacks Consensus Estimate is pegged at $3.33 per share which is within the guidance range of the company.

Our Take

Watsco has acquired about 60% shares of Carrier's HVAC network in Canada to form a joint venture. The company expects the acquisition, which was closed recently, to be accretive in 2012. With the deal closure, the company's sales run-rate is roughly $3.4 billion. However, the very basis of expansion remains exposed to the new home market. Slow recovery in housing starts may affect overall unit demand.

Currently, we have a long-term Neutral recommendation on Watsco. The company, which competes with Johnson Controls Inc. ( JCI ) and privately held Gensco Inc., retains a short-term Zacks #2 Rank ("Buy"). 


 
JOHNSON CONTROL ( JCI ): Free Stock Analysis Report
 
WATSCO INC ( WSO ): Free Stock Analysis Report
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: JCI , WSO

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