Watsco's ACDoctor website helps connect customers to HVAC systems. Source: Watsco.
Heating and cooling is something most Americans take for granted, even under tough conditions like the winter weather we've seen in recent months.
For Watsco (WSO 0.46%), which distributes HVAC systems, the trends toward upgrading older furnaces and air conditioners to take advantage of new high-efficiency technology has helped drive demand, and coming into Wednesday morning's first-quarter earnings report, Watsco investors hoped to see its string of strong results continue. Watsco's report largely surpassed those hopes, with another round of record results pointing to the strength of the industry.
Let's look more closely at how Watsco did to begin 2015 and what's ahead for the company.
More gains for Watsco
Watsco continued to see the same trends that have powered it higher in recent quarters. Revenue climbed 6% to a new record of $809 million, topping the consensus estimates among those following the stock by about half a percent. Earnings of $0.65 per share represented about a 10% beat compared to investor expectations, with the 35% jump from year-ago levels marking another record result for the company.
Watsco achieved a number of unprecedented results in some key areas. Operating income jumped 32% to a record $47 million as margin expansion continued to drive results. Operating margins climbed more than a full percentage point to 5.8%, another record high, with rising gross margins helping to contribute to Watsco's bottom-line success. Particularly impressive was the company's reduction in overhead costs, which sent selling, general, and administrative costs to a new record low as a percentage of sales.
Source: Watsco.
As we've seen before, all three of Watsco's main business units grew, with the HVAC equipment division showing the greatest increase in sales, at 8%. By contrast, the commercial refrigeration business climbed at a 5% pace, while sales in the Other HVAC Products category rose just 2%. With HVAC making up nearly two-thirds of Watsco's revenue, though, its success largely carried the overall company's results higher.
CEO Albert Nahmad was pleased with Watsco's performance. In addition to noting the earnings and margin strength, Nahmad pointed to "continued investment in products, technology, and people to drive sales and innovation in our business." So far, those principles have served the company well, and Nahmad expects that trend to continue.
Watsco looks to heat up
Indeed, Watsco has high hopes for continued strength in the HVAC arena. As Nahmad said:
As we head into the selling season, we are focused on the same proven fundamentals: gain share for our supplier partners, anticipate and react quickly to the needs of our contractor customers, and empower and reward our team of local leaders to grow sales and profits with greater efficiency.
Earnings guidance for $5 to $5.20 per share reflects those hopes, with the range representing 16% to 20% growth from 2014 levels.
It's reasonable for investors to expect even more favorable numbers for Watsco during the rest of 2015. The first quarter is seasonally weak for Watsco, as the company gets a huge portion of its business from replacing air conditioning and heating systems, which typically slows down during the winter months. With seasonal peaks usually coming in the second and third quarters, Watsco shareholders can look forward to even greater activity levels in the quarters to come.
Source: Watsco.
The size of Watsco's potential opportunity is enormous. The company points to about 89 million central air conditioning and heating systems that are at least 10 years old as being ripe for upgrades, especially in light of new mandated energy efficiency and environmental standards. Watsco estimates the value of the HVAC market in the Americas to be about $35 billion, and claiming just a fraction of that potential could make a huge impact on Watsco's financial results in the years to come.
Watsco's business isn't glamorous, but it is important, and it has been extremely lucrative for long-term shareholders over time. With the company still having plenty of promise for the future, Watsco continues to offer opportunities for those seeking stable yet proven business concepts to include within their portfolios.
