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Equipment distributor Watsco (NYSE:WSO) fell short of analysts' expectations in Q2 CY2024, with revenue up 6.8% year on year to $2.14 billion. It made a GAAP profit of $4.49 per share, improving from its profit of $4.42 per share in the same quarter last year.
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Watsco (WSO) Q2 CY2024 Highlights:
- Revenue: $2.14 billion vs analyst estimates of $2.19 billion (2.2% miss)
- EPS: $4.49 vs analyst expectations of $4.70 (4.5% miss)
- Gross Margin (GAAP): 27.1%, down from 28.1% in the same quarter last year
- Free Cash Flow of $51.38 million, down 47.5% from the previous quarter
- Same-Store Sales rose 4% year on year (-6.3% in the same quarter last year) (miss vs. expectations of an 8.9% year-on-year increase)
- Market Capitalization: $18.85 billion
Originally a manufacturing company, Watsco (NYSE:WSO) today only distributes air conditioning, heating, and refrigeration equipment, as well as related parts and supplies.
Infrastructure DistributorsFocusing on narrow product categories that can lead to economies of scale, infrastructure distributors sell essential goods that often enjoy more predictable revenue streams. For example, the ongoing inspection, maintenance, and replacement of pipes and water pumps are critical to a functioning society, rendering them non-discretionary. Lately, innovation to address trends like water conservation has driven incremental sales. But like the broader industrials sector, infrastructure distributors are also at the whim of economic cycles as external factors like interest rates can greatly impact commercial and residential construction projects that drive demand for infrastructure products.
Sales GrowthReviewing a company's long-term performance can reveal insights into its business quality. Any business can have short-term success, but a top-tier one tends to sustain growth for years. Over the last five years, Watsco grew its sales at a solid 10.1% compounded annual growth rate. This shows it was successful in expanding, a useful starting point for our analysis.
We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Watsco's recent history shows its demand slowed as its annualized revenue growth of 3.4% over the last two years is below its five-year trend.
Watsco also reports same-store sales, which show how much revenue its established locations generate. Over the last two years, Watsco's same-store sales averaged 2.3% year-on-year growth. This number doesn't suprise us as it's in line with its revenue growth.
This quarter, Watsco's revenue grew 6.8% year on year to $2.14 billion, missing Wall Street's estimates. Looking ahead, Wall Street expects sales to grow 7.5% over the next 12 months.
Operating MarginOperating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. It's also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Watsco has managed its expenses well over the last five years. It demonstrated solid profitability for an industrials business, producing an average operating margin of 10.1%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it's a show of well-managed operations if they're high when gross margins are low.
Analyzing the trend in its profitability, Watsco's annual operating margin rose by 2.9 percentage points over the last five years, as its sales growth gave it operating leverage.
In Q2, Watsco generated an operating profit margin of 12.6%, in line with the same quarter last year. This indicates the company's cost structure has recently been stable.
EPSAnalyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.
Watsco's EPS grew at a spectacular 15.3% compounded annual growth rate over the last five years, higher than its 10.1% annualized revenue growth. This tells us the company became more profitable as it expanded.
Diving into Watsco's quality of earnings can give us a better understanding of its performance. As we mentioned earlier, Watsco's operating margin was flat this quarter but expanded by 2.9 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don't tell us as much about a company's fundamentals.
Like with revenue, we also analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For Watsco, its two-year annual EPS declines of 1.5% show its recent history was to blame for its underperformance over the last five years. We hope Watsco can return to earnings growth in the future.
In Q2, Watsco reported EPS at $4.49, up from $4.42 in the same quarter last year. Despite growing year on year, this print missed analysts' estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Watsco to grow its earnings. Analysts are projecting its EPS of $13.07 in the last year to climb by 11.9% to $14.62.
Key Takeaways from Watsco's Q2 Results We struggled to find many strong positives in these results. Its revenue unfortunately missed and its . Overall, this was a bad quarter for Watsco. The stock remained flat at $503.67 immediately after reporting.
