Watsco (WSO) Up 0.4% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Watsco (WSO). Shares have added about 0.4% in that time frame, underperforming the S&P 500.

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

Watsco (WSO) Q3 Earnings Surpass Estimates, Revenues Up Y/Y

Watsco, Inc. reported third-quarter 2021 results, wherein earnings topped the Zacks Consensus Estimate while revenues missed the same.  Nevertheless, the top and the bottom line grew impressively on a year-over-year basis.

The solid results were mainly backed by strong sales growth, a richer sales mix of high-efficiency systems, improved margins and operating efficiencies as well as strategic acquisitions. Also, stepped-up investments to increase customer adoption at various technology platforms, which boost customer experience, enhance operational efficiency and help contractors grow and better serve homeowners and businesses, are commendable.

Inside the Numbers

Watsco’s quarterly earnings of $3.62 per share topped the consensus estimate of $3.55 by 2% and increased 31% year over year.

Total revenues of $1,782.6 million missed the consensus mark of $1,819 million by 2%. Nonetheless, it increased 16% from the year-ago period. Sales also rose 8% on a same-store basis. The upside was primarily driven by investments in customer-focused technologies and the expansion of the company’s branch network. Also, continued investment in technologies designed to revolutionize customer experience added to the positives.

Sales of HVAC equipment (heating, ventilating and air conditioning; comprising 69% of sales) were up 7% year over year. Sales of other HVAC products (27% of sales) also increased 12% from the prior-year quarter. Sales from commercial refrigeration products (4% of sales) rose 27% year over year.

Operating Highlights

Gross margin expanded 280 basis points (bps) for the quarter to a record level of 27.1%. SG&A expenses increased 28% year over year, growing 143 bps as a percentage of sales.

Operating margin expanded 140 bps year over year to a record level of 11.6%.

Financial Operations

As of Sep 30, 2021, cash and cash equivalents were $137.2 million compared with $146.1 million at 2020-end. Cash from operations came in at $319.7 million for the first nine months of 2021 compared with $372.8 million a year ago.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 10.79% due to these changes.

VGM Scores

At this time, Watsco has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% 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 upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Watsco has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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