Watsco (NYSE: WSO) reported record sales, improving cash flow, and an improving balance sheet in its most recent quarter. But the results weren't quite what Wall Street had expected.
After the earnings release, shares of the industrial equipment distributor were trading down about 5% as of noon ET.
Growth, but short of expectations
Watsco is a distributor of parts and supplies for the heating, air conditioning, and refrigeration (HVAC) industry. The company earned $4.49 per share in the quarter on revenue of $2.14 billion, generating 7% year-over-year sales growth.
The company saw strong 8% growth in its HVAC equipment segment, which accounts for 71% of total sales. Operating cash flow also turned positive and improved by $100 million, with $58 million in reported cash flow in the quarter.
But Wall Street had expected $4.68 per share in earnings on sales of $2.2 billion, and gross margin in the quarter fell 100 basis points to 27.1%.
Is Watsco a buy?
Watsco has been an impressive performer over the years thanks to the company's ability to roll up small distributors and drive efficiency and scale gains. The stock was up more than 20% for the year heading into earnings and perhaps got ahead of itself.
On the post-earnings call, management said quarter-to-quarter margin fluctuations are to be expected as manufacturers adjust pricing and as inventories are replenished, but it sees business as usual up ahead. For long-term-focused investors, business as usual has generated market-beating returns, and there is nothing in this earnings report to suggest Watsco can't continue to deliver in the years to come.
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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Watsco. The Motley Fool has a disclosure policy.
