Watsco: A Compelling Play on HVAC/R Industry Outlook

Sep.28.09 | About: Watsco, Inc. (WSO)

Watsco, Inc. ([[WSO]] - Analyst Report) has increased its market share significantly through acquisitions. Since 1989, the company has acquired around 53 HVAC/R businesses. Despite the economic slowdown, Watsco continues to actively seek acquisition opportunities to allow further penetration into existing markets and expand into new geographic markets.

WSO is the largest distributor of air conditioning, heating, and refrigeration equipment, as well as related parts and supplies (HVAC/R), in the United States.

In our view, the company has plenty of room for growth. With the industry size approximated at $26 billion and annual growth set to grow well above 3%, Watsco represents a very small portion of the overall pie (8%). There are plenty of acquisition opportunities for the company as the HVAC/R distribution industry contains over 1,300 companies.

Apart from growth through acquisitions, Watsco aims to increase sales per location and gain market share by boosting its product offering.

The company recently formed a joint-venture with Carrier Corporation to distribute Carrier, Bryant and Payne products throughout the U.S. Sunbelt, Latin America and the Caribbean. This joint-venture not only adds significant new product groups to the company's sales mix, but also marks its entry into international markets with the addition of the Latin American and Caribbean sales operations of Carrier.

Moreover, Watsco is offering private label products to customers looking for exceptional value. We believe Watsco is becoming a one-stop shop for contractors and dealers.

With a healthy cash generation ability (operating cash flow of $94.1 million and free cash flow of $90.5 million over the last 12 months) and a strong balance sheet, Watsco has adequate financial flexibility in invest further in business expansion.