Watsco (WSO) gains in technology amid inflation problems

Watsco limited liability company WSO is positioned to benefit from its continued investment in industry-leading technologies, aggressive acquisitions and consistent focus on rewarding shareholders. An additional positive is the gradual transformation from manual processes to a fully digital platform.

However, intense inflation, supply chain disruptions and labor market problems are impacting the construction sector. In addition, Watsco invests heavily in technology implementation, which ultimately increases costs. Seasonality and competitive pressures are other problems.

Let’s dive into the drivers

Investments in technology: Watsco increased its annual technology spending in 2022 by 14% to $49 million. As the digital age progresses, speed, productivity and efficiency will become increasingly important. As a result, Watsco is investing in technologies that improve the customer experience through e-commerce. It uses various new technologies to transform the homeowner experience, which will help the company expand its customer base.

It currently has the industry’s largest database of digital product information, with nearly 1 million SKUs used annually by more than 350,000 technical contractors and technicians through its Product Information Management database. Additionally, HVAC Pro+ mobile apps give customers real-time access to key information, improving their speed and productivity. By the end of 2022, the authenticated user community had grown by 20% to over 51,000 users.

E-commerce drive: Thanks to various technology platforms, e-commerce sales increased by 17% at the end of 2022 compared to the year-ago period. E-commerce sales in the last 12 months exceeded $2.3 billion and accounted for 32% of total sales, including revenues.

Additionally, Watsco’s digital sales platform for HVAC/R contractors and CreditForComfort (its companion consumer financing platform) – OnCallAir – generated $939 million in gross merchandise value in 2022, reflecting 49% year-over-year growth.

Solid liquidity and satisfactory shareholders: Watsco has a strong balance sheet position and sufficient liquidity to weather the continuing crisis. The company ended 2022 with cash and cash equivalents of $147.5 million, up from $118.3 million at year-end 2021.

Watsco has paid cash dividends for 49 consecutive years. It remains focused on sharing cash flow with shareholders and maintaining a strong financial position. The company has increased its dividend in 21 of the last 22 years. In January 2023, it announced an annual dividend increase of 11% to $9.80 per share.

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Higher costs: Watsco is impacted by persistent inflation and supply chain issues. In 2022, SG&A expenses increased 15% year-over-year due to pandemic-related business challenges and a sharp increase in variable operating costs, including performance-based company-wide compensation, excess logistics and freight costs due to supply chain disruptions, and others inflation effects. While profits increased in the fourth quarter of 2022, selling, general and administrative expenses increased by 3.3% year-over-year.

Seasonal sales: Sales of residential central air conditioners, heating equipment, and parts and supplies for Watsco and other companies such as AAON, Inc. AND HE, Comfort Systems USA, Inc. FIX i Lennox International Inc. LII.

Watsco’s profitability will be favorably or unfavorably affected depending on the severity or mildness of weather conditions during the summer and winter selling seasons. The first and fourth quarters of each company calendar are characterized by disproportionate seasonality due to the nature and timing of replacement of HVAC systems.

Historically, demand for the residential central air conditioning replacement market has been relatively low in the first and fourth quarters. Likewise, demand for heating equipment is generally impacted in the second and third quarters.

A short discussion about other companies

AAONThe fourth quarter of 2022 benefited from multiple price increases initiated throughout the year, reduced supply chain impacts and significant improvements in production efficiency across all shop floors. The company continues to adapt quickly and maximize production despite ongoing challenges with parts shortages.

AAON ended the fourth quarter of 2022 with a record backlog of $548.0 million, an increase of 110.6% compared to $260.2 million as of December 31, 2021. AAON surprises with results for the last four quarters averaging 5 .7%.

Comfort systems ended 2022 with a solid backlog of $4.06 billion, compared to $3.25 billion as of September 30, 2022 and $2.31 billion as of December 31, 2021. Same-store backlog increased from $2.31 billion as of December 31, 2021 to $4.03 billion as of December 31, 2022. The backlog level reflects a company’s ability to generate higher revenues in the future.

FIX surprises with results for the last four quarters, averaging 9.9%.

Lennoxgrowth in all three segments (residential, commercial and refrigeration) and solid profit realization from commercial activities are driving growth. To address ongoing inflation challenges, the company is implementing higher prices.

LII’s results for the last four quarters have surprised at an average level of 5.7%.

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