Watsco's (WSO) Q2 Earnings & Revenues Miss, Shares Fall

Watsco, Inc. WSO reported second-quarter 2018 results, wherein both the top and bottom lines missed the Zacks Consensus Estimate. Evidently, shares of Watsco dropped 6.8% at the end of yesterday’s trading session.

Quarterly earnings of 2.40 per share in the second quarter missed the consensus mark of $2.47 by 2.8%. However, the reported figure increased 16% year over year. The upside stemmed from higher unit demand, as well as improved pricing and sales mix. Continued investment in the technologies designed to revolutionize Watsco’s customer experience also add to the positives. Notably, the second quarter registered the highest sales and profits in the company’s history.

Total revenues of $1.33 billion in the quarter missed the consensus mark of $1.34 billion by 0.2% but grew 5% year over year. The increase was primarily driven by strong unit demand, higher equipment pricing and an improved sales mix of high-efficiency systems.

Sales of HVAC (heating, ventilating and air conditioning, comprising 68% of sales) went up 6%; other HVAC products sales increased 5%, and commercial refrigeration products sales increased 1% in the quarter on an annualized basis.

Cost and Margins

Cost of sales went up 4.8% to $1,102 million from $965.6 million a year ago. Gross profit improved 3.3% year over year to $320.8 million. Gross profit margin, however, declined 20 basis points (bps) from the prior-year quarter to 24.1%.

Selling, general and administrative expenses rose 3.1% year over year to $186.6 million. As a percentage of sales, SG&A expenses improved 20 bps year over year.

Operating income increased 6.2% year over year to $137.3 million. Operating margin expanded 20 bps year over year to 10.3%.

Watsco, Inc. Price, Consensus and EPS Surprise

Watsco, Inc. Price, Consensus and EPS Surprise | Watsco, Inc. Quote

Financial Operations

As of Jun 30, 2018, cash and cash equivalents were $72 million compared with $80.5 million at the end of 2017. Cash used in operations came in at $19.3 million in the first six months of 2018 against cash flow from operations of $35 million a year ago.

Watsco approved a 16% hike in annual dividend to $5.80 per share, effective April 2018.

Zacks Rank & Key Picks

Watsco currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the Zacks Construction sector include NCI Building Systems, Inc. NCS, PGT Innovations, Inc. PGTI and Advanced Drainage Systems, Inc. WMS.

NCI and PGT sport a Zacks Rank #1 (Strong Buy) while Advanced Drainage carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

NCI Building Systems surpassed the consensus mark in three out of the trailing four quarters, recording an average surprise of 25.02%. Also, the company’s earnings are expected to increase 77.5% in 2018.

PGT Innovations surpassed estimates in three out of the last four quarters, with an average surprise of 14.28%. Also, the company’s earnings are expected to grow 52.5% in 2018.

Advanced Drainage Systems’ current-quarter earnings are estimated to be up 44.4% year over year.

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