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Investors Should Watch Watsco With Caution

Aug. 27, 2015 7:35 AM ETWatsco, Inc. (WSO)2 Comments
William Bias profile picture
William Bias


  • Watsco sells HVAC equipment and parts.
  • Watsco proves quite capable in generating organic revenue and net income growth.
  • Watsco’s free cash flow has declined for three years straight.

It's important for long-term investors to develop a guide for doing their investment research. Over the years I have developed questions to guide me in my thinking when researching the publicly traded universe. Right now let's talk about Watsco (NYSE: NYSE:WSO).

1.) What does the company do?

When you buy shares in a company you effectively become part owner of that company. Therefore, it's important for an investor to understand what a company sells. Watsco is the largest company in North America to distribute HVAC parts and equipment, making it a market leader in a highly fragmented industry.

2.) What do the fundamentals look like?

Investors should also look for companies that grow revenue and free cash flow over the long-term, retaining some of that cash for reinvestment back into the business and for economic hard times. Excellent revenue and free cash flow growth serve as catalysts for superior long-term gains.

Over the past five years Watsco grew its revenue and net income 47% and 116%, respectively. However, its free cash flow declined 24% during that time (see chart below). Watsco's revenue increased due to a mixture of same store sales increases, price increases expansion and acquisitions. Same store sales increased four of the past five years, with the exception of 2011, serving as an indication of healthy demand increases. The company also demonstrates a tendency of keeping costs under control, contributing to the healthy growth in net income. However, I am a little concerned about Watsco's decrease in free cash flow, which is adversely impacted by accounts receivable, inventory and capital expenditures over the past three years.

WSO Revenue (<a href=

WSO Revenue (NYSE:TTM) data by YCharts

Watsco shows similar fundamental patterns in FY 2015. The company saw its year-to-date revenue and net income increase 5% and 21%, respectively, year-over-year in the most recent quarter. However, its free cash

This article was written by

William Bias profile picture
I have been analyzing stocks since 1992 and a freelance writer since 2012.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (2)

Edward J. Roche profile picture
Great company, would like a slightly better price. Could benefit from global warming and trend to move to the south.
WSO has been in my portfolio a long time. Over the years it dramatically out performed everything else and done so consistently.
The biggest risk is that Mr Nahmad controls the company with well over 50% of the voting shares. Fortunately he and his team have done a great job.
It is my largest holding because it has performed so well. The dividend performance is amazing. It could find my entire retirement if I needed it to.
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