Watsco Is a Stock to Consider

HVAC company enjoyed record-setting 1st quarter

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Watsco (WSO, Financial) is the largest distributor of air conditioning, heating and refrigeration equipment and related parts and supplies in the HVAC/R distribution industry, currently operating 565 locations in the U.S., Canada, Mexico and Puerto Rico with additional market coverage on an export basis to Latin America and the Caribbean. This network has been built over the last 25 years and serves 88,000 active customers. Watsco is developing and investing in technologies to enable sales via ecommerce, online marketplaces and through the retail sales channel.

The company reported a record first quarter and witnessed consistent growth in both residential and commercial markets. It also welcomed increased sales of higher-efficiency replacement systems.

First-quarter results

EPS increased by 9% and was a record 71 cents.

Operating income increased by 8% and was a record $51 million (it was around $47 million in the prior-year quarter).

Operating margins expanded 20 basis-points and stood at a record 6.0%.

Sales increased by 5% and were a record $851 million (around $809 million during the prior-year quarter).

Gross profit increased by 4% and was a record $212 million (it was $202 milion during the prior-year quarter).

SG&A as a percentage of sales witnessed 40 basis points.

Operating cash flows stood at a record $42 million versus a cash use of $17 million last year.

Debt reduction was $103 million (compared to the prior-year quarter).

Trend in sales

  • Seven percent growth in HVAC equipment (65% of sales) including 10% growth in the U.S.
  • Four percent sales growth for other HVAC products (30% of sales) including 6% in the U.S.
  • Six percent growth in commercial refrigeration products (5% of sales).

(Source: Company’s website)

Factors behind growth

  • Enabling great service through a dense network of locations.
  • Competing by forging long-term supplier partnerships.
  • Improving performance and revolutionizing customers’ businesses.

Focus

  • It plans to strengthen its industry leadership position.
  • Continue to build market share with long-term supplier partners.
  • Transforming business into a modern, data-based powerhouse poised to outperform in the digital era.
  • Expanding network.
  • Compete in partnership with great brands and manufacturers.
  • Maintain a conservative financial position that provides flexibility to invest in almost any-sized opportunity at a low cost of capital.

On a concluding note

The market for HVAC/R products, on an installed basis, is an estimated $80 billion in North America, and this company has ample growth opportunities.

2015 was an exceptional year regarding sales, operating profit, operating margins, earnings per share and cash flow. It started in the distribution business about 25 years ago and has made the company the largest in the industry. It is working with supplier partners, invested in best-of-breed technologies and has developed and launched a number of innovations. The company is doing well now, and adding it is going to create shareholder returns.

Disclosure: I do not hold any position in the company.

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