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$WSO write-up
As we did not manage to restore the extract we released on Friday, here is a short summary of the free version of our deep-dive 👉 Riding the HVAC Industry tailwinds: An Investment Analysis of Watsco Inc
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Highlights:
  • A leading distributor of HVAC/R equipment in North America, with 673 locations, 7,200 employees, serving 120K+ customers.
  • Revenue CAGR of 7.6% and operating income CAGR of 13.2% over FY12-Q1'23.
  • TTM Revenues: c. $7.3B, Operating margin: 11%.
  • Trades at an EV/EBITDA of 15.4 (10Y average of 14.8).
  • Watsco has cash and cash equivalents of $141 million compared to total debt and lease liabilities of $529 million.

History:
  • $WSO has a history as a manufacturer of HVAC/R parts before transitioning to a distribution-only business model in 1989. Since then, it has grown through organic expansion and successful acquisitions, generating a 30-year annualized total shareholder return of 18%.
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Source: Watsco, Inc. 4Q22 Investor presentation

Business Model:
  • Watsco relies on the replacement market, serving a fragmented base of contractors who service end customers. With only 10-15% of its business coming from new construction, the company is resilient to economic downturns.
  • The distributor-to-contractor relationship is crucial, as contractors make recommendations to end customers to buy equipment from Watsco.
  • Watsco's value proposition to contractors comprises of product availability, a high density of locations, support, and technology.

Sales mix:
  • Revenue is divided into HVAC Equipment, Other HVAC Products and Commercial Refrigeration Products.
  • HVAC Equipment dominates revenue (68%), benefiting from the trend towards replacement versus repair.
  • 90% of revenue is derived in US (2/3 in Sun belt region -> due to favorable weather conditions).
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Source: StockOpine Analysis, Stratosphere.io

Customers & Suppliers:
  • 120k customers - no single customer accounts for more than 2% of sales.
  • Strategic relationship with key suppliers but high reliance on $CARR (60% of purchases).
  • Long standing relationships & other joint ventures with $CARR mitigate concentration risk.
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Source: Watsco’s website

Regulation catalysts for the industry:
  • The new federal mandate for efficiency standards (effective from 2023) requires the upgrade to higher efficiency HVAC equipment across the entire United States.
  • This will drive replacements presenting a long-term tailwind for $WSO.
  • New refrigerant standards from 2025, incorporating lower global warming potential refrigerants, will drive more demand for replacements as cost to service and repair goes up.

--That's a high level summary of the free version of our write-up.--

🤝 As a reminder, students with an .edu email can benefit from a 50% discount (if you face any issues or you are a student without an .edu email but wish to subscribe to the paid tier contact us).
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Disclaimer: The content of our newsletter is not a trading or investment advice and we do not provide any personal investment advice tailored to the needs of any recipient. The information provided should not be considered as a specific advice on the merits of any investment decision.
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Todor Kostov's avatar
Todor Kostov
@kostofffMay 2
@stockopine Great work posting the whole free version! 👏
StockOpine's avatar
StockOpine
@stockopineMay 2Author
@kostofff thank you Todor. Hopefully it gives a good introduction to the company.
Todor Kostov's avatar
Todor Kostov
@kostofffMay 2
@stockopine Awesome! 👌
Ben's avatar
Ben
@rpinvestmentsMay 2
Big fan of $WSO. It’s high up on my watch list right next to $NVR $POOL and $ODFL
StockOpine's avatar
StockOpine
@stockopineMay 2Author
@rpinvestments if you like $WSO you might also like $FERG .
Ben's avatar
Ben
@rpinvestmentsMay 2
@stockopine love new companies to look into. I’ll let you know what I think
StockOpine's avatar
StockOpine
@stockopineMay 2Author
@rpinvestments excellent. We have a write-up on it as well but prefer to hear your own view before you read it :)
Ben's avatar
Ben
@rpinvestmentsMay 3
@stockopine most the balance sheet review looks good. Except for the debt. In last 3 quarters added approx 3 bil in debt. Now with 3.9 bil total long term debt. Including adding 1.9 bil debt at high interest rates in the most recent quarter. What’s your view on the recent debt raises?

Otherwise improving margins. High ROI. Steadily growing business in a boring but necessary industry
StockOpine's avatar
StockOpine
@stockopineMay 4Author
@rpinvestments are you referring to $FERG? You might have spotted something different than us but we do not observe an increase of $3B in last 3 quarter (more like of $1.2B y/y), yet we agree with the final balance.

Debt was primarily raised to support the buyback activity of the company in 2022 and currently stands at the lower end of targeted Net debt / adjusted EBITDA ratio so not a real concern in our opinion.
Ben's avatar
Ben
@rpinvestmentsMay 4
@stockopine they raised (should have said raised instead of added) 1.05 bil in April 2022, .44 bil in July 2022 and 1.95 in Jan 2023. Now they did use some of these proceeds to pay maturing debt. But they raised higher interest rate debt to pay older lower interest debt and do buy backs. So net debt changed as you stated.
The interest payments are low at 10% of op income. It’s not that they are overly leveraged. It’s that I prefer to invest in only the best. $FERG uses all its cash from operations on capex and acquisitions. It mainly pays for its dividend and buybacks with debt.

In comparison $TREX and $BLD have enough free cash flow to buy back shares without raising debt.
StockOpine's avatar
StockOpine
@stockopineMay 5Author
@rpinvestments fair enough. If you don't feel comfortable investing in such stocks then you shouldn't. Using debt in the capital structure is not necessarily bad as it lowers the cost of capital, however, too much debt can have undesired effects (especially under this environment). Nevertheless, we don't think that $FERG would have any solvency issues.
Dissecting the Markets's avatar
Dissecting the Markets
@dissectmarketsMay 2
Your newsletter quality is superb. Keep up the great work!
StockOpine's avatar
StockOpine
@stockopineMay 3Author
@dissectmarkets thank you so much. We appreciate your kind and encouraging feedback.
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