Shares of Watsco Inc.WSO surged 9.93% yesterday after the company reported record fourth-quarter 2015 earnings per share of 75 cents, which increased 9% year over year and also beat the Zacks Consensus Estimate of 73 cents. The outperformance was driven by record sales, market share gains and an all-time high cash flow. Watsco witnessed consistent growth in both residential and commercial markets, with continued strength in sales of high-efficiency replacement systems.
Total revenues in the quarter increased 3% year over year to a record $903 million. Sales of HVAC (heating, ventilating and air conditioning) increased 6%, other HVAC products remained flat and commercial refrigeration products increased 4%. However, revenues fell short of the Zacks Consensus Estimate of $905 million.
Cost and Margins
Cost of sales increased 3% year over year to $682 million. Gross profit grew 4% year over year to $222 million while gross margin increased 20 basis points (bps) from the year-ago quarter to 24.6%.
Selling, general and administrative expenses (SG&A) rose 3% year over year to $168 million. Income from operations increased 4% year over year to a record $54 million. Operating margin increased 10 basis points from the prior-year quarter to 6%.
Watsco had cash and cash equivalents of $35 million at the end of 2015 compared with $24 million at 2014 end. The company recorded cash flow from operations of $221 million in 2015, compared with $145 million in 2014.
Watsco announced a 21% increase in its annual dividend to $3.40 per share which came into effect from Jan 2016.
Watsco reported record earnings per share of $4.90 in 2015, up from $4.32 in the prior year. Earnings were ahead of the Zacks Consensus Estimate of $4.87. Earnings came in at the top end of the guidance of $4.85 to $4.90. Revenues increased 4% year over year to $4,113 million but fell short of the Zacks Consensus Estimate of $4,117 million.
Watsco's digital initiatives center around investments in scalable platforms for mobile apps, e-commerce, business intelligence and supply chain optimization. Watsco's strategic goals will help to further strengthen its leadership position, accelerate sales and profit growth, increase the speed and convenience of serving customers and extend the company's reach into new geographies and sales channels
Watsco has immense potential in the replacement market given an aging stock of air conditioners and heating systems in the U.S. The company will benefit from expansion of its product offering as well as logistical and productivity improvements. Dividend hikes and share repurchases will be accretive to earnings. However, foreign currency headwinds, seasonal factors and lack of acquisitions will weigh on Watsco's results.
Watsco currently has a Zacks Rank #2 (Buy). Some of the other stocks in the sector worth considering are Comfort Systems USA Inc. FIX , Nortek Inc. NTK and Albany International Corp. AIN . While Albany International Corp. (AIN) sports a Zacks Rank #1 (Strong Buy), Nortek and Albany International carry a Zacks Rank #2 (Buy).
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