Watsco Q2 Earnings Lag, Revenues Beat, Margins Down Y/Y

Watsco, Inc. WSO reported mixed second-quarter 2024 results, with earnings missing the Zacks Consensus Estimate but revenues beating the same. On a year-over-year basis, both the top and bottom lines grew, given better residential end-markets and improved SG&A performance.

Following the announcement, shares of Watsco lost 1.1% on Jul 30.

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.

In the first half of 2024, OnCallAir presented quotes to around 160,000 households, marking an 18% increase compared to the same period last year. Additionally, it generated $743 million in gross merchandise value, a 27% increase year over year.

Inside the Numbers

Watsco reported quarterly earnings per share of $4.49, which lagged the Zacks Consensus Estimate of $4.70 by 4.5%. In the year-ago quarter, the company reported adjusted EPS of $4.42.

Revenues of $2.14 billion topped the consensus mark of $2.13 billion by 0.3% and grew 6.8% year over year.

Sales of HVAC equipment (heating, ventilating and air conditioning, comprising 71% of sales) were up 8% year over year. Sales of other HVAC products (25% of sales) dropped 1% from the year-ago quarter. On the other hand, sales from commercial refrigeration products (4% of sales) increased 1% year over year.

Second-quarter sales indicate a stronger residential market, with 6% growth in ducted residential units and a 3% rise in the average selling price. Additionally, sales of commercial products increased 8% during the quarter, building on 18% growth recorded in the year-ago quarter.

E-commerce sales continue to surpass overall sales growth, increasing 13% during the quarter and accounting for 36% of total sales, including revenues from recently acquired businesses. In some regions, e-commerce sales make up more than 60% of total sales.

Operating Highlights

The gross margin contracted 100 basis points (bps) in the second quarter to 27.1%. Our model predicted the gross margin to contract 30 bps year over year. SG&A expenses, as a percentage of sales, decreased 20 bps year over year to 15% in the quarter, much better than our expectation of an increase of 10 bps year over year.

The operating margin declined 70 bps year over year in the second quarter to 12.6%. Our estimate for the metric was 13%.

Financial Operations

As of Jun 30, 2024, Watsco's cash and cash equivalents, along with short-term cash investments, totaled $424.9 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 six months of 2024, net cash provided by operating activities was $161.4 million compared with a net cash outflow of $89.2 million in the same period last year.

Watsco has paid dividends for 50 consecutive years and increased its annual dividend rate by 10% to $10.80 per share, effective April 2024.

Zacks Rank & Some Recent Construction Releases

Watsco currently carries a Zacks Rank #3 (Hold).

United Rentals, Inc. URI reported mixed second-quarter 2024 results. The company's EPS surpassed the Zacks Consensus Estimate, but revenues missed the same. Nonetheless, both metrics registered improvement on a year-over-year basis.

United Rentals achieved record highs in revenues, adjusted EBITDA, and EPS. The company's performance aligns with its expectations for the year, driven by the successful integration of Yak. This acquisition enhances URI's strategy to expand its specialty rental business, enhance its one-stop-shop offerings, and leverage opportunities for both secular growth and cross-selling.

KBR, Inc. KBR reported mixed second-quarter 2024 results, with earnings surpassing the Zacks Consensus Estimate and revenues missing the same. The top and bottom lines increased on a year-over-year basis.

KBR performed well across key metrics and expects this trend to continue for the rest of the year. Driven by robust performance in its core business, KBR raised its adjusted EBITDA and cash flow guidance for 2024.

Otis Worldwide Corporation OTIS reported mixed results in the second quarter of 2024. Its adjusted earnings topped the Zacks Consensus Estimate and grew year over year. The company reported better-than-expected earnings in the trailing seven quarters. However, quarterly net sales missed the consensus mark and declined on a year-over-year basis.

Otis expects net sales between $14.3 billion and $14.5 billion compared with the prior mentioned $14.5-$14.8 billion. Organic sales growth is projected to be 1-3%, down from the prior stated 3-5%. Organic New Equipment sales are expected to be down in the mid-single digits, and organic Service sales are expected to be 6-7%.

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