It has been about a month since the last earnings report for Watsco (WSO). Shares have added about 14.2% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Watsco due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Watsco Q3 Earnings & Revenues Lag Estimates
Watsco reported unimpressive third-quarter 2024 results. Both the earnings and revenues missed the Zacks Consensus Estimate.
On a year-over-year basis, the top line increased, driven by better commercial HVAC systems and stable residential HVAC equipment. However, bottom lines declined due to higher costs.
Watsco is steadily advancing toward its goal of expanding customer-focused technologies to a growing number of contractors. Its e-commerce sales have surged at nearly twice the pace of its overall sales, highlighting success in scaling industry-leading tools and platforms. Additionally, mobile platforms are engaging a record number of contractors and technicians, which is expected to enhance operating efficiencies over time.
Inside the Numbers
Watsco reported quarterly earnings per share (EPS) of $4.22, which lagged the Zacks Consensus Estimate of $4.84 by 12.8% and declined 3% from the year-ago figure of $4.35.
Revenues of $2.16 billion missed the consensus mark of $2.25 billion by 3.9% but grew 2% year over year.
Sales of HVAC equipment (heating, ventilating and air conditioning, comprising 71% of sales) were up 1% year over year. Sales of other HVAC products (25% of sales) dropped 2% from the year-ago quarter. Sales from commercial refrigeration products (4% of sales) fell 4% year over year.
Watsco’s unit sales within residential HVAC equipment stabilized during the 2024 selling season (i.e., second and third quarters on a combined basis). It also witnessed solid growth in sales of commercial HVAC systems.
E-commerce sales increased 5% during the first nine months of 2024 and accounted for 35% of total sales, including revenues from recently acquired businesses. In some regions, e-commerce sales comprise more than 60% of total sales.
In the first nine months of 2024, OnCallAir presented quotes to around 258,000 households, marking a 17% increase compared to the same period last year. Additionally, it generated $1.2 billion in gross merchandise value, a 22% increase year over year.
Operating Highlights
The gross margin contracted 50 basis points (bps) in the reported quarter to 26.2%. SG&A expenses, as a percentage of sales, rose 10 bps year over year to 15.1% in the quarter versus our expectation of a decrease of 10 bps year over year.
The operating margin declined 50 bps year over year in the third quarter to 11.6%.
Financial Operations
As of Sept. 30, 2024, Watsco’s cash and cash equivalents totaled $294.4 million, up from $210.1 million at the end of 2023. The company has no borrowings under its unsecured $600 million credit facility, providing substantial access to capital for new growth opportunities.
In the first nine months of 2024, net cash provided by operating activities was $394.2 million compared with $263.3 million in the same period last year.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review.
The consensus estimate has shifted -10.14% due to these changes.
VGM Scores
Currently, Watsco has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. Following the exact same course, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Watsco has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.
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Watsco, Inc. (WSO) : Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
