The harsh winter has proven the importance of being able to heat your home, and the companies that make and deliver the furnaces and other heating, ventilation, and air-conditioning systems that keep homes and businesses comfortable in all seasons play a vital role in the health and well-being of their customers. HVAC system distributor Watsco (NYSE:WSO) has benefited from the consumer trend toward upgrading to higher-efficiency furnaces and air conditioners, and in its fourth-quarter financial report, Watsco confirmed the huge growth opportunity in the sector by posting record results. Let's look at Watsco's latest performance and what it says about the company's prospects for 2015 and beyond.
Another quarter, another set of records for Watsco
As we've seen in past quarters, Watsco has been riding a wave that has repeatedly sent many of its key metrics to unprecedented heights. Revenue grew 6% to $877 million, which eclipsed the $873 million that investors had anticipated and represented a new record for sales. Earnings of $0.69 per share was also a new record, and the 38% jump from the year-ago level beat the consensus projection by $0.06 per share. Margin expansion helped Watsco make the most of its rising sales, as operating margin rose by a full percentage point to a new high of 5.9%, thanks in large part to reductions in overhead costs.
Watsco's three main business units all showed growth, but some areas grew faster than others. HVAC equipment sales rose 8%, accelerating slightly from last quarter's pace as demand for residential equipment remained heightened. The commercial refrigeration business also grew by 8%, while Watsco's sales of other HVAC products climbed by 2%, continuing its trend of lagging behind the other segments.
For the full year, Watsco showed similar success. Earnings rose to a record $4.32 per share on $3.94 billion in sales, with HVAC equipment and commercial refrigeration sales each climbing 7%. Residential sales climbed 9% for the full year, showing the interest in upgrading HVAC equipment among homeowners.
Can Watsco stay hot?
CEO Albert Nahmad expressed satisfaction at Watsco's results. "We saw continued strength in sales of residential HVAC systems," Nahmad said in a press release, "from strong unit demand and an improved mix of higher-efficiency systems. Overall, our results represent a great finish to another excellent year." Nahmad specifically said he believes 2014 laid the foundation for solid growth for this year and beyond, citing the addition of 200 sales and market-development employees, along with network expansion that broadened Watsco's reach into local markets.
Watsco also rewarded dividend investors during the quarter. Last month, the company said it would boost its payout by 17% to $0.70 per share, giving investors a 2.5% dividend yield to go with the share-price appreciation they have enjoyed over the past several months.
One concern Watsco needs to keep an eye on is the potential impact of lower energy prices on its sales. The relatively cheap price of natural gas compared to oil has led to a notable number of household furnace conversions away from heating oil, especially in areas like New England in which heating oil remained popular the longest. Persistent low oil prices, though, could remove some of the incentive for furnace owners to convert. Yet Watsco's strength in selling higher-efficiency systems shows many consumers are just as interested in cutting their energy use overall as they are in reaping savings from substituting cheaper fuel sources.
As long as the makers of HVAC technology continue to provide new advances, Watsco has put itself in a great position of delivering that equipment to professional contractors and other end users. With housing continuing to expand and the economy firing up, Watsco has the potential to have an even stronger year in 2015.