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Longbow Research Downgrades Watsco, Says HVAC Company Could Struggle With Margin Target

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Longbow Research Downgrades Watsco, Says HVAC Company Could Struggle With Margin Target
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HVAC equipment distributor Watsco Inc (NYSE: WSO) reported a second-quarter revenue and earnings miss July 25, sending the stock sharply lower. 

The Analyst

Longbow Research's Chris Dankert downgraded Watsco from Buy to Neutral.

The Thesis

While Dankert said he likes Watsco's long-term story, he's concerned the company will struggle to reach its margin target of 15-20 percent. (See the analyst's track record here.) 

Efficiency gains can't offset labor, freight and product cost inflation and higher investment in technology, the analyst said.

"The company is making the right investments in order to secure and gain market share over time," he said. 

Timing is unfavorable for the stock, as it often falls on Q3 earnings due to high expectations, Dankert said. He expects the company to report calendar 2018 EPS of $6.75, slightly above the consensus. Longbow forecast sales growth of 6.5 percent and an EBIT margin of 8.5 percent.

The analyst projects calendar 2019 EPS at $7.35, with 4.9-percent sales growth and an EBIT margin of 8.9 percent.

The Price Action

Watsco shares were trading down 1.67 percent at the time of publication Monday afternoon.

Related Links:

Benzinga's Top Upgrades, Downgrades For July 30, 2018

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Latest Ratings for WSO

DateFirmActionFromTo
Oct 2018BuckinghamMaintainsNeutralNeutral
Oct 2018JefferiesInitiates Coverage OnHold
Oct 2018BuckinghamInitiates Coverage OnNeutral

View More Analyst Ratings for WSO
View the Latest Analyst Ratings

Posted-In: Chris Dankert Longbow ResearchAnalyst Color Downgrades Analyst Ratings Best of Benzinga

 

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