Company Description: Watsco Inc. is the largest U.S. distributor of air-conditioning, heating and refrigeration equipment, and related products.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value (see page two of the linked PDF for a detailed description):
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
WSO is trading at a premium to all four valuations above. The stock is trading at a slight discount to its calculated fair value of $69.29. WSO earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics (see page two of the linked PDF for a detailed description):
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
WSO earned two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. WSO earned a Star for having an acceptable score in at least two of the four Key Metrics measured.
Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2001-2004, 2002-2005, 2003-2006, etc.) I consider this a key metric since dividends will double every five years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1984 and has increased its dividend payments for 10 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section (see page two of the linked PDF for a detailed description):
1. NPV MMA Diff.
2. Years to > MMA
WSO earned a Star in this section for its NPV MMA Diff. of the $8,498. This amount is in excess of the $2,500 target I look for in a stock that has increased dividends as long as WSO has. If WSO grows its dividend at 15.0% per year, it will take 2 years to equal a MMA yielding an estimated 20-year average rate of 4.1%. WSO earned a check for the Key Metric 'Years to >MMA' since its 2 years is less than the 5 year target.
Memberships and Peers: The company's peer group includes: GATX Corp. (NYSE:GMT) with a 3.0% yield, Applied Industrial Technologies, Inc. (NYSE:AIT) with a 2.1% yield and Fastenal Co. (NASDAQ:FAST) with a 1.4% yield.
Conclusion: WSO earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks WSO as a 4 Star-Strong stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $105.78 before WSO's NPV MMA Differential decreased to the $2,500 minimum that I look for in a stock with 10 years of consecutive dividend increases. At that price the stock would yield 2.11%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,500 NPV MMA Differential, the calculated rate is 11.1%. This dividend growth rate is well below the 15.0% used in this analysis, providing a significant margin of safety. WSO has a risk rating of 1.75 which classifies it as a Medium risk stock.
WSO is a well-run company with a solid balance sheet and a history of strong dividend increases. Although the last two years increases of about 8% were well below the preceding 10 years. One area of concern is WSO's chairman has almost complete voting control through his holdings of the company's super-voting Class B shares. The company's shares are trading at a slight discount to my calculated Fair Value Price of $69.29. However, I plan to watch this company a little longer before committing to a position.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in WSO (0.0% of my Income Portfolio). See a list of all my income holdings my income holdings here.
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