Watsco's 1Q Earnings Beat, Revs Miss - Analyst Blog

Watsco Inc. ( WSO ) reported first-quarter 2013 adjusted EPS of 39 cents, up 70% from 23 cents earned in the year-ago quarter and ahead of the Zacks Consensus Estimate of 33 cents, on the back of increased sales, better selling margins and operating efficiencies.

Total revenue increased 13% to a record $714 billion but marginally short of the Zacks Consensus Estimate of $715 million with same-store sales increasing 3%. Residential air conditioning and heating (HVAC) equipment sales increased 6% while commercial HVAC equipment dipped 5%. Other HVAC products were up 1% and commercial refrigeration products grew 7%.

Cost and Margins

Cost of sales increased 11% to $538.2 million in the quarter. Gross profit was up 16% to $175.4 million. Gross profit margin expanded 80 basis points (bps) to 24.6%. Selling, general and administrative expenses rose 11% to $144.9 million in the quarter. Income from operations increased 53% to record $30.5 million. Operating margin increased 110 basis points to 4.3%.

Financial Operations

Cash and cash equivalents were $22 million as of Mar 31, 2013, compared with $73.8 million as of Dec 31, 2012. For the quarter, cash flow from operating activities was usage of $17.5 million, mainly due to the typical, seasonal building up of inventories prior to gear up for the selling season. Debt-to-capitalization ratio remained flat at 24% as of Mar 31, 2013 compared with Dec 31, 2012.

Watsco paid $9 million in dividends during the quarter. In Jan 2013, Watsco announced it established a regular quarterly dividend rate of 25 cents per share.

Guidance for 2013

Watsco expects to generate earnings per share in the range of $3.60 to $3.75. This projects an annual growth rate of 19% to 24%, reflecting organic growth, accretion from Canada and the benefit of increasing Watsco's ownership in the first Carrier joint venture by 10% last July. Watsco expects to meet or exceed its annual target of generating cash flow greater than net income in 2013. Watsco plans to reduce its debt and evaluate the option of an increased dividend before the end of 2013.

Our Take

Watsco continues to increase its presence in the international markets, which currently contributes 16% of its total sales. Domestically, the company continues to witness growth in the residential product segment and the momentum is expected to continue in 2013 as well, aided by the recovery in the housing market.

Watsco has immense potential in the replacement market of air conditioners and heating systems in the U.S, as nearly 89 million of them are more than 10 years old. Furthermore, backed by its solid balance sheet, Watsco expects to increase its dividend and make additional investments going forward.

Watsco currently retains a Zacks Rank #3 (Hold). Watsco's peer Lennox International, Inc. ( LII ) is expected to report its first-quarter results on Apr 22, while AAON Inc. ( AAON ) will report its results on May 7 followed by Comfort Systems USA Inc. ( FIX ) on May 8.

AAON INC (AAON): Free Stock Analysis Report

COMFORT SYSTEMS (FIX): Free Stock Analysis Report

LENNOX INTL INC (LII): 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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