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Watsco Tops EPS, Misses Sales - Analyst Blog

Watsco Inc. ( WSO ) fiscal 2011 fourth quarter EPS increased 26% to 39 cents from 31 cents reported in the year-earlier quarter. EPS comfortably surpassed the Zacks Consensus Estimate of 35 cents.

Total revenue dropped 1.8% year over year to $646 from the prior-year quarter of $657 million. Revenue in the quarter was hurt by 12% on a same-store-sales basis. Revenue missed the Zacks Consensus Estimate of $699 million.

Fiscal 2011 Performance

In 2011, EPS was $2.74, increasing 10% year over year from $2.49. EPS surpassed the Zacks Consensus Estimate of $2.67.

Total revenue saw an increase of 5% to $2.98 billion from $2.84 billion. Total revenue also fell below the Zacks Consensus Estimate of $3.04 billion.

Costs and Margins

Cost of sales in the quarter decreased 3.7% to $485 million from the year-earlier quarter. Gross profit was up 4.3% year over year to $161 million. Consequently, gross margin improved 150 basis points year over year to 24.9% in the quarter.

On a same-store basis gross profit decreased 6% year over year, while gross margins increased 180 basis points year over year to 25.1%.

SG&A expenses during the quarter decreased 3% to $128 million from $132 million in the year-ago quarter. Income from operations soared 49% to $33 million from $22 million in the prior-year quarter. Consequently, operating margin also increased 170 basis points year over year to 5%.

Financial Position

As of December 31, 2011, cash and cash equivalents decreased to $15.7 million from $126.5 million as of December 31, 2010. In 2011, Watsco used $61 million of operating cash flow, primarily to fund approximately $87 million of incremental vendor payments from one-time change in payment terms.

Watsco's borrowings were $20 million for a net debt position near zero. Watsco's Board of Directors has approved a 9% increase in the quarterly dividend to 62 cents per share. Watsco has not increased its annual dividend since 2001.

Our Take

Watsco has a fundamental environmental factor working in its favor. Its network is concentrated in the southern and southwestern U.S. (the Sunbelt region), where air conditioning is considered a necessity.

United States currently has 74 million central air conditioning and heating systems installed, which are older than 10 years. These systems are generally below the government mandated energy efficiency and environmental standards. Thus, Watsco has a great opportunity to replace these older systems with its lower energy consumption and environment-friendly solutions.

However, a decline in housing starts, reduction of the tax credit for homeowners for purchasing a high efficiency HVAC unit and higher costs of replacing with the R410A refrigerant, remain concerns. The shares of Watsco currently retain a Zacks #3 Rank (short-term Hold recommendation).

Watsco is the largest distributor of air conditioning, heating and refrigeration equipment as well as related parts and supplies in the United States. The company operates 508 locations serving over 50,000 customers in 36 states, Puerto Rico, Latin America and the Caribbean. Watsco competes with Johnson Controls Inc. ( JCI ) and privately held Gensco Inc and Gustave A. Larson Companies.

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 Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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