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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%.
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).
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.
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.--
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