Watsco's (NYSE: WSO) stock has had an incredible run. Since 1992, this parts supplier's stock has averaged 21% total returns, including stock price appreciation and dividends, annually.
According to Watsco, only 29 publicly traded stocks have averaged 20%-plus total returns annually for at least three decades (as of the end of 2021). Other, more attention-grabbing names on the list include Apple,Oracle, Lowe's, and UnitedHealth Group. Fortunately for Watsco shareholders, there is no correlation between headlines and returns.
The company has quietly amassed high returns by consistently executing in a relatively boring industry. While past performance is no indication of future returns, there are several reasons to think Watsco can continue to perform well going forward.
A strong network is Watsco's secret weapon
Watsco distributes replacement heating, ventilation, and air conditioning (HVAC) parts. What's made the company so successful is its acquisition strategy. The HVAC market is highly fragmented, meaning it's made up of a huge number of small distributors. There are roughly 6,700 distributors, and Watsco has grown to be (by far) the biggest on the list.
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Since 2001, Watsco has invested roughly $804 million in acquisitions. Each takeover adds new geographies and products to strengthen the company's distribution network. Watsco made a practice of quickly and efficiently plugging each acquired company into its system. Over that time, Watsco grew its net income from $24.4 million to $3.6 billion.
What's next for Watsco?
Watsco has been rolling out an innovative new e-commerce platform for the past few years. Traditionally, its local HVAC repair customers needed to send out a technician to diagnose problems, find a location with a replacement part, then complete the job.
Watsco's platform can be operated from any mobile device and allows technicians to order parts right from the job site and have them delivered or available for immediate pickup. Technicians can complete more jobs per day, and the HVAC repair companies become more profitable.
In a fragmented business like HVAC distribution, being the big guy with its own e-commerce platform has its advantages. Since an overwhelming majority of Watsco's competition is small-scale, few of its competitors have the capital to build out their own platforms. Being one of the only distributors with the scale to build an e-commerce platform, Watsco stands to take an increasing share of the market.
Customer engagement has grown rapidly. E-commerce revenue grew 26% in 2021 to $2 billion. Orders on the platform grew 18% to 1.5 million, and customers are buying more per online order than in retail channels.
One of the most compelling features of the platform has nothing to do with sales. Watsco's acquisition strategy neatly tucked new companies into its network, but the platform will allow them to bring smaller targets into its expansive distribution network faster than before.
Is Watsco stock a buy right now?
The stock has come down about 9% this year and now trades at a price-to-earnings ratio of 21.4. Watsco's valuation compares favorably to the S&P 500, which appears a bit more expensive at a P/E of nearly 23. Watsco's e-commerce platform allows the company to flex its muscles and steal business from smaller players in the years to come. It also provides Watsco with an advantage in its acquisition strategy that it didn't have before.
The stock currently offers investors a unique combination of growth and value. The stock has paid a regular dividend that has increased along with earnings over the last couple of decades. Its dividend yield hovers around 3%. Buy-and-hold investors who care more about returns and less about news coverage should seriously consider adding Watsco shares to their accounts right now.
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BJ Cook has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Watsco. The Motley Fool recommends Lowe's and UnitedHealth Group and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
