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Growth Picks Up as Watsco Enters the Hot Season

By Dan Caplinger – Apr 24, 2018 at 10:32AM

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Find out how the HVAC specialist positioned itself for the key spring and summer months.

Weather has an impact on many businesses, but it's hard to find a company whose results are more directly tied to the weather than HVAC system specialist Watsco (WSO -1.75%). Given that the company relies on customers who want to upgrade their residential and commercial heating and cooling systems, the winter months are usually a slow sales period that the company uses to prepare for a big ramp up in demand when the weather gets warm and people need reliable air conditioning.

Coming into Tuesday's first-quarter financial report, Watsco investors were ready to see record earnings on solid sales growth. The company largely met those expectations, and it has even higher hopes as it heads into its peak spring and summer selling period.

Three people around an air conditioner outside next to a home, with two shaking hands.

Image Source: Watsco.

Watsco got off to a hot start in 2018

From a certain perspective, one could view the Q1 report as mixed. Revenue soared 6% to $927 million, setting a new record and coming in $16 million higher than most of those following the stock had expected. Net income growth of 31% to $34 million was also good, although the resulting earnings of $0.89 per share missed the consensus forecast by $0.01 per share.

Watsco's overall sales growth sped up from the previous quarter.  HVAC equipment sales jumped 8%, accelerating from their pace of growth in Q4 2017. In the "other HVAC products" category, revenue rose 5%, up from a 4% gain in the previous quarter. Commercial refrigeration product sales once again lagged, but flat year-over-year performance was still an improvement from the year-over-year declines that they have suffered recently.

Internally, Watsco also made progress. Operating income jumped 11% to a record level, and the company was able to expand operating margins slightly, helping produce greater profits. Cuts to sales expenses and overhead contributed to the company's healthier finances.

"Watsco delivered another record quarter, with strong growth rates for residential and commercial HVAC systems from increasing unit demand and an improved mix of high-efficiency systems," said CEO Albert Nahmad. He also noted that growth in employee headcount was starting to pay off, both through enhanced customer service and higher sales that have helped Watsco build up its market share.

What's next for Watsco?

"Although it is early, we are optimistic that 2018 will be a record year for our company," said Nahmad.

Steady investment in technological innovation has already contributed to the company's growth, and management intends to continue with that for the foreseeable future. Watsco believes that by providing a better customer experience for contractor professionals and end users alike, it can increase its sales, and make it easier for its reseller clients to grow their own businesses. The company pointed to the benefits it has accrued from digitizing its marketplace through e-commerce portals and mobile apps, through which it offers comprehensive and detailed product information: Watsco now gets almost 30% of its revenue through e-commerce sales, and it expects that growth trend to continue.

At the same time, Watsco is also paying attention to its balance sheet. The company continued to reduce its outstanding debt during the quarter, furthering efforts from 2017. Its debt burden has fallen by nearly $200 million over the past 12 months.

Watsco stock has done well over the past several years, and nothing in Tuesday's report should lead investors to expect a change in that trend of gradual but solid improvement. If summer goes as well as the company hopes, then Watsco could continue to set new records in its business that will inevitably show up in its stock price.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Watsco. The Motley Fool has a disclosure policy.

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