Anyone can appreciate the importance of having good heating, ventilation, and air conditioning systems to keep you and those around you comfortable. For decades, Watsco (WSO +1.98%) has made it its business to distribute and sell the HVAC systems that get the job done for millions of residential and commercial customers. With an increasing migration of jobs and people to areas in which climate control is a necessity, Watsco has sought to capitalize on growing demand and find new ways to promote its products.
Coming into Thursday's fourth-quarter financial report, Watsco investors wanted to see continuing signs that the HVAC specialist was doing a good job of capitalizing on the opportunities in its industry right now. Watsco's numbers were solid, but some would've preferred to see even more positive momentum going into 2019.
Image source: Watsco.
Watsco coasts to the end of the year
Watsco's fourth-quarter report failed to meet everyone's expectations for the company. Sales climbed 3% to $991 million, but that was slightly lower than the $1.02 billion that most of those following the stock had wanted to see. Similarly, the company reported adjusted net income of $40 million, up 18% from year-earlier levels, but the resulting adjusted earnings of $1.02 per share fell short of the $1.06 per-share consensus forecast among investors.
Sales trends for the fourth quarter were generally slower than what Watsco had seen earlier in the year. HVAC equipment sales were up 3% from year-earlier levels, which was slower than the 4% rise Watsco saw in the third quarter. Sales of other HVAC products were up 4%, which was the same as the third quarter's growth rate, while commercial refrigeration sales stayed unchanged compared to year-earlier results. For the full year, HVAC equipment picked up 6% on the top line, with other HVAC products seeing 5% growth and commercial refrigeration staying flat for the year.
Watsco's efforts to boost its earnings efficiency also slowed down. Gross profit climbed at just a 4% rate, half the pace of growth in the third quarter. Operating income actually declined 5%.
Yet CEO Albert Nahmad was ambitious about the progress the company made in 2018 and what it means for the future. "We are proud of our track record and industry leadership position," Nahmad said, "but there is much more for us to achieve in the $35 billion North American HVAC/R distribution market." The CEO is working with executives in the company to find new ways to stay on the cutting edge of the business.
Check out the latest Watsco earnings call transcript.
How Watsco wants to foster growth
Watsco sees its future stemming from key initiatives. The company wants to invest further in technology to help its sales associates match up customer needs with the best products available, and adding more workers to help with customer service should help serve clients more effectively. Watsco is also adding data analytics capabilities to identify ways to cut costs. At the same time, a boost to 401(k) matching and a better wellness program for employees point to cultural shifts within Watsco's business organization.
Already, Watsco's efforts have paid off in many ways. E-commerce sales were up by a third in 2018 compared to 2017 levels, and increased warehouse efficiency and use of business intelligence capabilities show the internal commitment to making the best use of Watsco's expanded resources in those areas.
Notably absent, though, was express guidance for 2019 in the company press release. Instead, the company had some interesting metrics on how far it's come in the past 30 years, as Watsco marks its 30th anniversary in the HVAC distribution business.
Watsco investors didn't have a quick reaction to the results, with no substantial activity in the pre-market trading session following the announcement. Watsco still has further to go to maximize its growth opportunities, but 2018 has set in motion many of the elements that the HVAC specialist will need in order to take advantage of rising demand for the products and systems it offers its customers.
