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Category: Stock Market and Watsco
Date: 18 October 2019 Stock Price: $174.83 We take a look at the 3rd quarter earnings release of their 2019 fiscal year of Watsco, a firm specialising in distribution of heating, air conditioning and refrigeration products.
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About Watsco
Watsco is the largest distribution network for heating, air conditioning and refrigeration (HVAC/R) products with locations in the United States, Canada, Mexico and Puerto Rico, and on an export basis to Latin America and the Caribbean. Watsco estimates that over 300,000 contractors and technicians visit or call one of its 603 locations each year to get information, obtain technical support and buy products. HVAC/R products provide comfort to homes and businesses regardless of the outdoor climate. Older systems often operate below today’s government mandated energy efficiency and environmental standards. Watsco has an opportunity to accelerate the replacement of these systems at a scale greater than its competitors as the movement toward reducing energy consumption and its environmental impact continues. This is especially important since heating and cooling accounts for approximately half of the energy consumed in a typical U.S. home
Overview of Watsco's latest earnings report
The data provided below refers to the latest quarter's data unless specified otherwise
- Total revenue $1.394 billion (up from $1.296 billion from the same quarter of the previous year)
- Total revenue increased by 7.5% over the last 12 months
- Cost of sales: $1.060 billion (up from $976.998 million for the same quarter of the previous year)
- Cost of sales increased by 8.4% over the last 12 months
- Net income: $83.430 million (up from $79.163 million for the same quarter of the previous year)
- Diluted earnings per share: $2.20 (up from $2.11 for the same quarter of the previous year)
- Annual dividend paid: $6.40
- Dividend yield: 3.7%
- Diluted weighted-average shares outstanding: 34.788 million (up from 34.399 million for the same quarter of the previous year)
- Cash and cash equivalents: 60.150 million
- Cash and cash equivalents per share: $12.75
- Cash and cash equivalents makes up 4.5% of Watsco's market capital
- Cash and cash equivalents makes up 8.5% of Watsco's total assets
- Accounts receivable: $640.082 million
- Accounts receivable makes up 24.1% of Watsco's total assets
- Inventories: $970.475 million
- Inventories makes up 36% of Watsco's total assets
- Stockholders equity of Watsco: $1.753 billion
- Stockholders equity per share: $50.39
- So Watsco is trading at3.45 times its stockholders equity per share which is just outside the expected range of between 2 and 4 times that most firms tend to trade at.
- Cash generated from operations: $197.531 million
- Cash generated from operations per share: $5.68
Watsco's management commentary on the results and earnings guidance
MIAMI, Fla., Oct. 17, 2019 (GLOBE NEWSWIRE) -- Watsco, Inc. (NYSE: WSO) reported its third quarter results. Record sales, operating income, net income attributable to Watsco and earnings per share (EPS) were achieved for the quarter and nine-month periods ended September 30, 2019. Record operating cash flow for the nine-month period ended September 30, 2019 was also achieved.
Operating results include continued investments in a variety of technologies to revolutionize Watsco’s customer-experience, to create a data-driven culture and to enhance productivity and operational excellence. Watsco’s e-commerce revenues are expected to approach $1.5 billion for 2019 (a 25% increase over 2018), and the number of unique users of its contractor-focused mobile apps has increased 15% to over 88,000 year to date. The Company expects to accelerate the pace of change and innovation in its markets and is confident that its industry-specific focus, scale and leadership position will provide significant long-term value.
Watsco has also focused efforts on making investments in successful businesses to grow its network and build further scale. The Company completed several transactions during 2019, investing $133 million of capital in market-leading businesses through a combination of cash and Watsco shares. Operating results of acquired businesses were immediately accretive and are expected to provide new sources of growth as investments are made in support of their growth plans. The Company’s debt-to-total capitalization ratio remains low at 9%, consistent with the Company’s philosophy of maintaining a conservative, risk averse financial position, that enables the Company to aggressively invest in attractive opportunities at a low cost of capital.
Albert H. Nahmad, Watsco’s Chairman and CEO stated: “Watsco produced strong cash flow and record performance that reflects sales growth across the Company’s markets, solid revenue and profit contributions from recent acquisitions and improved operating efficiencies. We are optimistic that 2019 will be a record year for our company.”
Cash Flow & Dividends
Operating cash flow for the nine-month period was a record $198 million versus $70 million in 2018. Watsco expects to meet or exceed its annual goal of producing cash flow in excess of net income in 2019. Since 2000, Watsco’s operating cash flow was approximately $2.4 billion compared to net income of approximately $2.3 billion, surpassing the Company’s stated goal of generating cash flow in excess of net income.
Watsco has paid cash dividends for 45 consecutive years. Dividends paid increased 16% in 2019 to $180 million. The Company’s philosophy is to share increasing amounts of cash flow with shareholders through higher dividends while maintaining a conservative financial position. In January 2019, Watsco raised its annual dividend 10% to $6.40 per share. Future increases in dividends will be considered in light of investment opportunities, cash flow, general economic conditions and the Company’s overall financial condition.
Operating results include continued investments in a variety of technologies to revolutionize Watsco’s customer-experience, to create a data-driven culture and to enhance productivity and operational excellence. Watsco’s e-commerce revenues are expected to approach $1.5 billion for 2019 (a 25% increase over 2018), and the number of unique users of its contractor-focused mobile apps has increased 15% to over 88,000 year to date. The Company expects to accelerate the pace of change and innovation in its markets and is confident that its industry-specific focus, scale and leadership position will provide significant long-term value.
Watsco has also focused efforts on making investments in successful businesses to grow its network and build further scale. The Company completed several transactions during 2019, investing $133 million of capital in market-leading businesses through a combination of cash and Watsco shares. Operating results of acquired businesses were immediately accretive and are expected to provide new sources of growth as investments are made in support of their growth plans. The Company’s debt-to-total capitalization ratio remains low at 9%, consistent with the Company’s philosophy of maintaining a conservative, risk averse financial position, that enables the Company to aggressively invest in attractive opportunities at a low cost of capital.
Albert H. Nahmad, Watsco’s Chairman and CEO stated: “Watsco produced strong cash flow and record performance that reflects sales growth across the Company’s markets, solid revenue and profit contributions from recent acquisitions and improved operating efficiencies. We are optimistic that 2019 will be a record year for our company.”
Cash Flow & Dividends
Operating cash flow for the nine-month period was a record $198 million versus $70 million in 2018. Watsco expects to meet or exceed its annual goal of producing cash flow in excess of net income in 2019. Since 2000, Watsco’s operating cash flow was approximately $2.4 billion compared to net income of approximately $2.3 billion, surpassing the Company’s stated goal of generating cash flow in excess of net income.
Watsco has paid cash dividends for 45 consecutive years. Dividends paid increased 16% in 2019 to $180 million. The Company’s philosophy is to share increasing amounts of cash flow with shareholders through higher dividends while maintaining a conservative financial position. In January 2019, Watsco raised its annual dividend 10% to $6.40 per share. Future increases in dividends will be considered in light of investment opportunities, cash flow, general economic conditions and the Company’s overall financial condition.
Watsco (NYSE: WSO) stock price history
The image below, obtained from Google, shows the stock price history of Watsco (NYSE:WSO) for the last 5 years. And it's been a pretty good time for Watsco 5 years ago Watsco was trading at around $96.90 and its currently trading at $174.83. So the stock has provided Watsco.stockholders with a return of 80.9% over the last 5 years.
While the return provided by Watsco.is pretty good, the opportunity cost of holding the stock is pretty high when one looks as the strong growth over the last 5 years some of the other stocks we valued recently showed, with a large number of companies having grown by well over 100% over a 5 year period, for example Netflix that increased by over 300% over the last 5 years.
The stock of Watsco is trading at very close to its 52 week high of $176.64 and far away from its 52 week low of $131.88, which is a clear indication that the short term sentiment and momentum of Watsco's stock is very positive.
While the return provided by Watsco.is pretty good, the opportunity cost of holding the stock is pretty high when one looks as the strong growth over the last 5 years some of the other stocks we valued recently showed, with a large number of companies having grown by well over 100% over a 5 year period, for example Netflix that increased by over 300% over the last 5 years.
The stock of Watsco is trading at very close to its 52 week high of $176.64 and far away from its 52 week low of $131.88, which is a clear indication that the short term sentiment and momentum of Watsco's stock is very positive.
Recent coverage of Watsco
The extract below discusses Watsco in more detail as obtained from Zacks.com
Watsco, Inc. (WSO - Free Report) is slated to report third-quarter 2019 results on Oct 17, before the opening bell. In the last reported quarter, the company’s earnings and revenues lagged the Zacks Consensus Estimate by 5.5% and 1.2%, respectively. Its top line grew 3%, while bottom line was on par with the year-ago figure. Notably, in the said quarter, the company recorded the highest quarterly net income and revenues in its history. It is likely to have performed impressively in third-quarter 2019 as well, given solid acquisition-related activities and technology enhancement.
How are Estimates Faring?
Let’s take a look at the estimate revision trend in order to get a clear picture of what analysts are thinking about the company prior to the earnings release. The Zacks Consensus Estimate for the quarter to be reported is pegged at $2.25, remaining stable over the past 60 days. This indicates an increase of 6.6% from the year-ago earnings of $2.11 per share. Revenues are expected to be $1.38 billion, suggesting a 6.5% year-over-year increase.
Read the full article here
Watsco, Inc. (WSO - Free Report) is slated to report third-quarter 2019 results on Oct 17, before the opening bell. In the last reported quarter, the company’s earnings and revenues lagged the Zacks Consensus Estimate by 5.5% and 1.2%, respectively. Its top line grew 3%, while bottom line was on par with the year-ago figure. Notably, in the said quarter, the company recorded the highest quarterly net income and revenues in its history. It is likely to have performed impressively in third-quarter 2019 as well, given solid acquisition-related activities and technology enhancement.
How are Estimates Faring?
Let’s take a look at the estimate revision trend in order to get a clear picture of what analysts are thinking about the company prior to the earnings release. The Zacks Consensus Estimate for the quarter to be reported is pegged at $2.25, remaining stable over the past 60 days. This indicates an increase of 6.6% from the year-ago earnings of $2.11 per share. Revenues are expected to be $1.38 billion, suggesting a 6.5% year-over-year increase.
Read the full article here
Watsco (NYSE: WSO) latest stock valuation
So based on the 3rd quarter 2019 earnings report of Watsco what do we value Watsco stock at? Based on the earnings report released by the group our valuation model provides a target (full value) price for Watsco at $167.30 a stock. We therefore believe the stock of Watsco is overvalued.
We suggest long term fundamental and value investors look to enter the stock at least 10% below our current target (full value) price of $167.30. Therefore we believe a good entry point into Watsco is at $150.60 or below. We therefore expect Watsco to pull back slightly from its current price to closer to our target (full value) price in coming weeks and months.
We suggest long term fundamental and value investors look to enter the stock at least 10% below our current target (full value) price of $167.30. Therefore we believe a good entry point into Watsco is at $150.60 or below. We therefore expect Watsco to pull back slightly from its current price to closer to our target (full value) price in coming weeks and months.
Next earnings release of Watsco
It is expected that the 4th quarter earnings release of Watsco will be released in early January 2020