Watsco (WSO) Down 6.7% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Watsco (WSO). Shares have lost about 6.7% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Watsco due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Watsco Q4 Earnings & Sales Lag Estimates, Margins Down

Watsco, Inc. reported lackluster results in fourth-quarter 2019, wherein both earnings and revenues missed the Zacks Consensus Estimate. Also, its bottom line declined on a year-over-year basis due to higher SG&A.

In a bid to impress investors, Watsco announced 11% increase in annual dividend to $7.10 per share on each outstanding share of its common and Class B stock. The change will be reflected in its next quarterly dividend payment beginning in April 2020.

Inside the Numbers

Watsco reported quarterly earnings of 92 cents per share, missing the consensus estimate of $1.01 by 8.9%. Also, the said metric declined 9.8% from the year-ago level of $1.02 per share. Lower margins and continued costs associated with technology investments were partially offset by a lower tax rate in the quarter.

Total revenues of $1.07 billion lagged the consensus mark of $1.08 billion by 0.9% but increased 8.2% from the year-ago period. Sales grew 1% on a same-store basis. The upside stemmed from strong HVAC equipment business, partially offset by soft demand in a few markets served. Continued investment in the technologies designed to revolutionize its customer experience added to the positives.

Sales of HVAC equipment (heating, ventilating and air conditioning; comprising 67% of sales) were up 3%, and that of other HVAC products (29% of sales) increased 2% from the prior-year quarter. Also, sales from commercial refrigeration products (4% of sales) rose 4% in the quarter.

Operating Highlights

Cost of sales grew 9.5% from a year ago to $811.8 million. Gross margin contracted 90 basis points (bps) to 24.3%.

SG&A expenses increased 10% year over year due to addition of 35 locations. In fact, SG&A expenses — as a percentage of sales — surged 30 bps year over year. Operating margin contracted 100 bps year over year to 4.9%.

Financial Operations

As of Dec 31, 2019, cash and cash equivalents were $74.5 million compared with $82.9 million at 2018-end. Cash from operations came in at $335.8 million in 2019 compared with $170.6 million a year ago.

2019 Highlights

Watsco’s 2019 earnings came in at $6.50 per share, lagging the consensus mark of $6.52 by 0.3% but increasing 0.2% from 2018. Total revenues of $4.77 billion also missed analysts’ expectation by 0.2% but improved almost 5% year over year.

Gross margin contracted 30 bps to 24.3%. Operating margin declined 50 bps year over year to 7.7%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -7.51% due to these changes.

VGM Scores

At this time, Watsco has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Watsco has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.