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Why Is Watsco (WSO) Up 7.8% Since Last Earnings Report?

A month has gone by since the last earnings report for Watsco (WSO). Shares have added about 7.8% in that time frame, outperforming 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 Q1 Earnings & Revenues Lag, Margins Down Y/Y

Watsco reported tepid first-quarter 2024 results, with earnings and revenues lagging the Zacks Consensus Estimate. On a year-over-year basis, the top line grew while the bottom line dwindled.

The quarter’s results reflect a seasonal sales trend, wherein the sales of HVAC equipment and other HVAC products declined year over year. Furthermore, high costs and expenses impacted the bottom line of the company. This was partially offset by increased sales volume for commercial refrigeration products.

Moving into the summer selling season, the company is optimistic about growth in end-market demand. Also, its focus on improving its operating efficiency, investments in technology innovation, generating healthy cash flow and enhancing shareholder value is encouraging through 2024.

Inside the Numbers

Watsco reported quarterly earnings of $2.17 per share, lagging the Zacks Consensus Estimate of $2.26 by 4%. In the year-ago quarter, the company reported adjusted earnings per share of $2.83.

Revenues of $1.56 billion missed the consensus mark of $1.61 billion by 2.8% but inched up 0.9% year over year.

Sales of HVAC equipment (heating, ventilating and air conditioning, comprising 68% of sales) were down 1% year over year. Sales of other HVAC products (28% of sales) dropped 6% from the year-ago quarter. On the other hand, sales from commercial refrigeration products (4% of sales) increased 2% year over year.

Operating Highlights

The gross margin contracted 140 basis points (bps) in the first quarter to 27.5%. SG&A expenses, as a percentage of sales, increased 130 bps year over year to 19.8% in the quarter.

The operating margin declined 250 bps year over year in the first quarter to 8.1%.

Financial Operations

As of Mar 31, 2024, Watsco’s cash and cash equivalents were $278.9 million, up from $210.1 million in 2023 end. As of the first quarter of 2024, the net cash provided by operating activities was $103.7 million against the net cash used in operating activities of $47.4 million in the comparable period a year ago.

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How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, 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 downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Watsco has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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