Watsco Inc. (WSO) reported fourth-quarter earnings of 25 cents per share, above analysts’ expectations of 14 cents as well as the prior-year EPS of 12 cents.
 
The company’s total revenue increased 68.3% year over year to $563.6 million. The current-year quarter included $251 million of revenue added by Carrier Enterprise, a joint venture formed on July 1, 2009 with Carrier Corporation. The joint-venture added 95 locations to the Watsco network.
 
On a same-store basis, Watsco’s sales fell 7%, compared to the fourth quarter of 2008. The sales decline was driven by lower demand as a result of economic conditions and lower pricing for certain commodity-based products. These factors were partially offset by a richer sales mix of high-efficiency air conditioning systems.
 
Fourth quarter’s same-store sales reflect a 1% growth in sales of air conditioning and heating (HVAC) equipment, a 13% decline in sales of other HVAC products and a 15% decline in sales of refrigeration products.
 
The company posted a strong operating income growth of 175% to $15.8 million. Even on a same-store basis, operating income increased 64% to $9.9 million due to the company’s efforts to lower operating costs and improve efficiency.
 
Watsco continues to benefit immensely from the transition to higher-efficiency air-conditioning equipment. The company said that the increased unit sales in this product category (at higher prices) generated 82% sales growth over the last-year period.
 
The company sees huge potential in the replacement market as old units get replaced by more energy-efficient units in the coming years. Also, the company will benefit from the new economic stimulus legislation providing tax credits to homeowners for adding high-efficiency air conditioners or furnaces. We view the transition to higher energy-efficient units as the most critical factor for growth over the next couple of years. Higher efficiency units drive higher pricing and higher margins for the company.
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