Watsco, Inc. (WSO) reported second quarter 2008 EPS of $0.94, above our estimate of $0.88 and up 6.8% year-over-year, amid strong revenue growth and higher gross profit as well as contributions from various profit improvement activities implemented in early 2008.
WSO has the liquidity position and the de-levered balance sheet to continue with its aggressive acquisition strategy. With high energy prices likely to persist over the near future, we believe consumers will increase the purchase of higher-efficiency air conditioning systems. We also believe the strength of the replacement market can offset some of the rapid deterioration in the new home market in 2008. We recommend investors to Hold WSO shares in their portfolio.
WSO will deploy strategies like acquisitions to increase market share and consolidate a fragmented industry. The second strategy involves adding new products. The company is also offering private label products to customers looking for exceptional value. We believe WSO is becoming a one-stop shop for contractors and dealers.
Profit-improvement activities implemented in early 2008 contributed approximately $11 million to pre-tax income during the first half of the year and are expected to have another $20 million to $25 million positive impact over the next several quarters.
However, despite the demand boom that we expect from consumer uptake of higher-efficiency air conditioning systems, the company's sales remain exposed to the new home market. The decline in same-store sales remains a concern, too. The weakness persisted in 2008 with 1H08 same-store sales down 7%, including a 7% decrease in sales of HVAC equipment and an 11% decrease in other HVAC products, partially offset by a 2% increase in the sale of refrigeration products.
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