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Watsco (WSO) Shares Rise 16.6% on Q2 Earnings & Revenue Beat

Watsco, Inc.’s WSO shares gained more than 16% after the company reported impressive second-quarter 2020 results, wherein earnings and revenues beat the respective Zacks Consensus Estimate. A steady recovery of sales in May and double-digit sales growth in June helped it deliver a better-than-expected performance.

Given the current market conditions, the company has been adjusting business per the needs of customers, reducing costs in affected markets and improving efficiency. It believes that financial strength, backed by highly-conservative leverage ratios, access to low-cost capital and ability to generate cash flow, allows it to take advantage of investment opportunities of almost any value.

Inside the Numbers

Watsco’s quarterly earnings of $2.26 per share topped the consensus estimate of $1.91 by 18.3%. The reported earnings, however, declined 5.8% year over year.

Total revenues of $1.36 billion surpassed the consensus mark of $1.3 billion by 4% but decreased 1.2% from the year-ago period. Sales were down 6% on a same-store basis.

Sales of HVAC equipment (heating, ventilating and air conditioning; comprising 70% of sales) were down 4% year over year, including flat sales in U.S. residential markets. Sales of other HVAC products (27% of sales) also decreased 9% from the prior-year quarter. Sales from commercial refrigeration products (3% of sales) were down 15% year over year.

Watsco, Inc. Price, Consensus and EPS Surprise

Watsco, Inc. Price, Consensus and EPS Surprise

Watsco, Inc. price-consensus-eps-surprise-chart | Watsco, Inc. Quote

Operating Highlights

Gross margin contracted 30 basis points (bps) in the quarter. SG&A expenses improved 1% year over year. On a same-store basis, SG&A expenses — as a percentage of sales — improved 20 bps year over year as Watsco had a few store closings and loss of business across its network. Operating margin, on a same-store basis, contracted 10 bps year over year to 9.7%.

Financial Operations

As of Jun 30, 2020, cash and cash equivalents were $79.6 million compared with $74.5 million at 2019-end. Cash from operations came in at $261.3 million in the first six months of 2020 compared with $68.4 million in the comparable year-ago period.

Over the 12 months ended Jun 30, 2020, Watsco produced $529 million of operating cash flow versus net income of $285 million, repaid $186 million in debt and increased dividends by 11% to an annual rate of $7.10 per share.

Zacks Rank

Watsco — which shares space with AAON, Inc. AAON, Comfort Systems USA, Inc. FIX and Lennox International Inc. LII in the same industry — currently carries a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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