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Watsco (WSO) Misses on Q4 Earnings and Revenue Estimates


Watsco, Inc. WSO reported record fourth-quarter 2016 earnings per share of 81 cents, which increased 8% year over year. However, it fell short of the Zacks Consensus Estimate of 87 cents.

Total revenue in the quarter inched up 1% year over year to a record $914 million, but fell short of the Zacks Consensus Estimate of $951 million. Sales of HVAC (heating, ventilating and air conditioning) increased 2%, commercial refrigeration products climbed 3%; while other HVAC products edged down 1%.

Cost and Margins

Cost of sales went up 0.6% to $685.5 million from $681.8 million in the year-ago quarter. Gross profit advanced 2.7% year over year to $228 million; while gross margin expanded 40 basis points to 25%.

Watsco, Inc. Price

Watsco, Inc. Price | Watsco, Inc. Quote

Selling, general and administrative expenses rose 1.3% year over year to $170 million. Income from operations increased 7% year over year to another record of $58 million. Operating margin expanded 40 basis points from the prior-year quarter to a record 6.4%.

Financial Operations

Watsco had cash and cash equivalents of $56 million at the end of 2016 compared with $35.2 million at 2015 end. In 2016, the company delivered $277.8 million of operating cash flow compared with $221 million in 2015.

Watsco also raised its ownership stake in Carrier Enterprise Northeast LLC, a joint venture with Carrier, to 80% for approximately $43 million in cash.

The company paid dividends of $128 million in 2016. Watsco recently raised its annual dividend rate by 24% to $4.20 per share.

2016 Performance

Watsco posted record earnings of $5.15 per share for 2016, up 5% year over year. Earnings missed the Zacks Consensus Estimate of $5.17. Revenues for full-year 2016 were up 3% year over year to a record $4.2 billion. However, revenues missed the Zacks Consensus Estimate of $4.3 billion.

Watsco remains focused to achieve another record year in 2017, while driving the adoption and advancement of its technologies with customers. However, the company’s first and fourth quarters of each calendar year are highly seasonal due to the nature and timing of the replacement market for air conditioning systems. Further, Watsco’s performance will be hurt by foreign currency headwinds.

Share Price Performance

In the last one year, Watsco has underperformed the Zacks classified Building Products – Air Conditioner and Heating sub-industry with respect to price performance. The stock gained around 47%, while the industry rose 42% over the same time frame.

Zacks Rank & Key Picks

Watsco currently carries a Zacks Rank #2 (Buy).

Some other stocks worth considering in the same sector include Louisiana-Pacific Corporation LPX, LSI Industries Inc. LYTS and Owens Corning OC.

Louisiana-Pacific Corporation has delivered an average positive earnings surprise of 66.28% in the last four quarters. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

LSI Industries also boasts a Zacks Rank #1 and has delivered an average positive earnings surprise of 27.28% in the trailing four quarters. Owens Corning, another Zacks Rank #1 stock, has an average positive earnings surprise of 35.13% for the past four quarters.

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