KeyBanc Upgrades Watsco To Overweight, Sees Notable Upside

KeyBanc analyst Jeffrey Hammond upgraded Watsco Inc WSO to Overweight from Sector Weight with a price target of $320, implying an upside of 23%.
The analyst believes pessimism around the residential HVAC cycle has gotten too negative near-term, while he has gotten "increasingly comfortable" that a significant portion of Watsco's recent gross margin improvement is sustainable long-term.
With upward EPS revisions against a recent correction in Watsco's share price, Hammond contends that valuation is now at the low end of its historical trading range.
Recently, Watsco reported Q4 EPS of $2.02, an increase of 77% year-over-year, beating the consensus of $1.69, and Sales of $1.51 billion (+31% Y/Y, and +21% on a same-store basis), beating the consensus of $1.35 billion.
The operating income increased 76% Y/Y to $123 million and the margin expanded by 210 bps to 8.1%. The gross margin expanded by 290 bps to 27.3%.
The company recorded a 22% growth in HVAC equipment (68% of sales), +17% in other HVAC products (28% of sales), and +35% in commercial refrigeration products (4% of sales).
Watsco's operating cash flow was $350 million in FY21 versus $534 million last year.
The company authorized a 13% increase in the annual dividend to $8.80 per share effective next scheduled quarterly payment date on April 29, 2022.
Price Action: WSO shares are trading lower by 1.18% at $259.90 on the last check Monday.

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