Stock Analysis

Does Watsco (NYSE:WSO) Deserve A Spot On Your Watchlist?

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NYSE:WSO
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It's common for many investors, especially those who are inexperienced, to buy shares in companies with a good story even if these companies are loss-making. Unfortunately, these high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson. While a well funded company may sustain losses for years, it will need to generate a profit eventually, or else investors will move on and the company will wither away.

In contrast to all that, many investors prefer to focus on companies like Watsco (NYSE:WSO), which has not only revenues, but also profits. While profit isn't the sole metric that should be considered when investing, it's worth recognising businesses that can consistently produce it.

Check out the opportunities and risks within the US Trade Distributors industry.

How Quickly Is Watsco Increasing Earnings Per Share?

If you believe that markets are even vaguely efficient, then over the long term you'd expect a company's share price to follow its earnings per share (EPS) outcomes. That means EPS growth is considered a real positive by most successful long-term investors. Shareholders will be happy to know that Watsco's EPS has grown 28% each year, compound, over three years. As a general rule, we'd say that if a company can keep up that sort of growth, shareholders will be beaming.

Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. EBIT margins for Watsco remained fairly unchanged over the last year, however the company should be pleased to report its revenue growth for the period of 22% to US$7.2b. That's progress.

In the chart below, you can see how the company has grown earnings and revenue, over time. Click on the chart to see the exact numbers.

earnings-and-revenue-history
NYSE:WSO Earnings and Revenue History December 4th 2022

In investing, as in life, the future matters more than the past. So why not check out this free interactive visualization of Watsco's forecast profits?

Are Watsco Insiders Aligned With All Shareholders?

We would not expect to see insiders owning a large percentage of a US$9.5b company like Watsco. But we do take comfort from the fact that they are investors in the company. Indeed, they have a considerable amount of wealth invested in it, currently valued at US$664m. Investors will appreciate management having this amount of skin in the game as it shows their commitment to the company's future.

Is Watsco Worth Keeping An Eye On?

You can't deny that Watsco has grown its earnings per share at a very impressive rate. That's attractive. This EPS growth rate is something the company should be proud of, and so it's no surprise that insiders are holding on to a considerable chunk of shares. The growth and insider confidence is looked upon well and so it's worthwhile to investigate further with a view to discern the stock's true value. We should say that we've discovered 2 warning signs for Watsco (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

Although Watsco certainly looks good, it may appeal to more investors if insiders were buying up shares. If you like to see insider buying, then this free list of growing companies that insiders are buying, could be exactly what you're looking for.

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.

What are the risks and opportunities for Watsco?

Watsco, Inc., together with its subsidiaries, distributes air conditioning, heating, refrigeration equipment, and related parts and supplies.

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Rewards

  • Earnings have grown 19.4% per year over the past 5 years

Risks

  • Earnings are forecast to decline by an average of 1.3% per year for the next 3 years

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