Watsco Upped to Strong Buy on Strong Replacement Demand - Analyst Blog

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On Jun 25, 2014, Zacks Investment Research upgraded the distributor of air conditioning, heating, and refrigeration equipment,  Watsco, Inc. WSO to a Zacks Rank #1 (Strong Buy), driven by decent first-quarter 2014 results and an anticipated demand improvement in the replacement market.

Why the Upgrade?

Watsco has been witnessing positive estimate revisions on the back of decent first-quarter 2014 results. Adjusted earnings improved 23% year over year to a record 48 cents per share aided by higher sales, stronger selling margins and improved operating efficiencies. Total revenue also increased 7% year over year to a record $763 million.

Management outlined its long-term plans to increase revenues to above $10 billion and margins above 10%. This will be driven by organic growth initiatives, including new product offerings, geographic expansion, and logistical, productivity improvements, in addition to continued consolidation of the North American HVAC industry.

Notably, the market for residential central air conditioning, heating and refrigeration equipment and related parts and supplies in the Americas is worth approximately $35 billion. Watsco now owns 10% of the market and has immense potential to increase its market share as no other competitor can match Watsco's geographic footprint.

Further, Watsco will continue to benefit from demand in the replacement market as old units get replaced by more energy-efficient units in the coming years. There are approximately 89 million central air conditioning and heating systems installed in the U.S. that have been in service for more than 10 years. Moreover, higher efficiency units mean higher pricing and in turn higher margins for the company.

Moreover, Watsco plans to purchase an additional 10% interest in the Carrier Corporation, a wholly owned subsidiary of United Technologies Corp. UTX in July. This is expected to be accretive to Watsco's earnings.

These bullish factors led to an upward estimate revision in recent times. Over the last 60 days, the Zacks Consensus Estimate for 2014 increased 0.4% to $4.47 per share and for 2015, the same increased 0.8% to $5.24 per share.

Other Stocks to Consider

Some other stocks in the same sector that warrant a look include Nortek Inc. NTK and EMCOR Group Inc. EME. Both the stocks hold a Zacks Rank #2 (Buy).


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WATSCO INC WSO: Free Stock Analysis Report

UTD TECHS CORP UTX: Free Stock Analysis Report

EMCOR GROUP INC EME: Free Stock Analysis Report

NORTEK INC NTK: Get Free Report

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