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Why Shares of Watsco Are Higher Today

By Lou Whiteman – Updated Jul 23, 2020 at 1:02PM

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Earnings came in well above expectations as conditions improved for the heating and air-conditioning equipment seller as the quarter went on.

What happened

Shares of Watsco (WSO 3.99%) were up 16% at 1 p.m. EDT on Thursday after the distributor of heating, ventilation, and air-conditioning (HVAC) equipment reported better-than-expected quarterly results. Investors went into earnings season expecting the worst for industrial companies due to pandemic-related disruptions, but a steady recovery as the quarter went on led to results that easily beat analyst expectations.

So what

Prior to the markets opening on Thursday, Watsco reported second-quarter earnings of $2.26 per share on revenue of $1.36 billion, beating expectations for EPS of $1.88 on revenue of $1.3 billion.

An HVAC technician works on a system.

Image source: Getty Images.

CEO Albert H. Nahmad issued a statement saying that although April was slow, "our residential HVAC equipment business recovered steadily and drove record, double-digit sales and profit growth rates in June 2020." Nahmad said that momentum has continued into July, raising hopes for the third quarter as well.

Cash flow remains solid, with Watsco producing $529 million in operating cash flow in the 12 months ending June 30 while still repaying $186 million in debt and increasing its dividend by 11%.

Now what

The company said it is seeing signs that some of its investments in tech are paying off during the pandemic. So far in 2020, it has added curbside pickup options, improved digital customer outreach, and gained some traction by selling HVAC contractors its digital sales platform that enables them to remotely generate proposals for homeowners.

The company said that e-commerce accounted for about 33% of 12-month sales as of June 30, up from 29% at year's end.

With Thursday's jump, shares of Watsco are now up 23% year to date, and 40% in the last 12 months. Given how fast the shares have climbed, it seems unlikely the momentum will continue indefinitely, but Watsco appears to be well positioned for the long haul.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Watsco. The Motley Fool has a disclosure policy.

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