Watsco Increases Stake In Carrier Enterprise Joint Venture

The distributor of air conditioning, heating and refrigeration equipment, Watsco, Inc. (NYSE:WSO) has raised its stake by 10% in Carrier Enterprise Northeast LLC, a joint venture (JV) with Carrier Corporation for about $43 million. The company now has 70% ownership in Carrier, a leader in high technology heating, air-conditioning and refrigeration solutions. Watsco's shares have gained 4% since the announcement.

Carrier is part of UTC Climate, Controls & Security, a unit of United Technologies Corp. (NYSE:UTX) , a leading global provider to aerospace and building systems industries.

The JV has sales of approximately $500 million in two countries, which includes 43 locations in the northeastern United States and 12 locations in Mexico. It offers a variety of products manufactured by Carrier along with approximately 25,000 other stock keeping units.

The Watsco-Carrier alliance dates back to 2009, when the former entered into a 60:40 JV with Carrier Corporation. The JV was known as Carrier Enterprise I. Carrier contributed 95 of its company-owned locations in 13 Sun Belt states and Puerto Rico, and its export division in Miami and Florida, while Watsco contributed 15 locations that distributed Carrier products. In Jul 2012, Watsco exercised its option to acquire an additional 10%. Further, hiked its interest by 10% in Carrier Enterprise I in Jul 2014. The company’s current stake in Carrier Enterprise I is at 80%. Neither Watsco nor Carrier have any option to further increase ownership stake in Carrier Enterprise I.

In 2011, Watsco entered into a second JV with Carrier and completed two additional transactions. Carrier contributed 28 of its company-owned locations in eight Northeast U.S. States, and Watsco contributed 14 locations in the Northeast U.S. In Jul 2011, Watsco purchased Carrier’s distribution operations in Mexico, which included seven locations. Collectively, the Northeast locations and the Mexico operations are referred to as Carrier Enterprise II. Before the current transaction, Watsco had a 60% controlling interest in Carrier Enterprise II, while Carrier has a 40% non-controlling interest.

In 2012, Watsco had formed a third JV (Carrier Enterprise III) with UTC Canada Corporation, an affiliate of Carrier. Carrier contributed 35 of its company-owned locations in Canada to Carrier Enterprise III. The company has 60% controlling interest in Carrier Enterprise III, while UTC Canada has a 40% non-controlling interest.

These JVs not only added new products to Watsco's portfolio, but also marked the company’s entry into the international markets with the addition of Latin American and Caribbean sales operations.

WATSCO INC Price

The company has immense growth potential in the replacement market, given an aging stock of air conditioners and heating systems in the U.S. The company will benefit from the expansion of its product offering as well as logistical and productivity improvements. In the long run, Watsco aims to reduce infrastructure costs, which will provide it with the opportunity to increase operating margins. Additionally, Watsco is actively transforming its business into the digital age by investing in innovative platforms for mobile apps, eCommerce, business intelligence and supply chain optimization.

The company’s strategic goals will help to further reinforce its leadership position, accelerate sales and profit growth, increase the speed and convenience of customer service. It will also extend its reach to new geographies and sales channels. Management has long-term plans to grow revenues to above $10 billion and achieve margins of more than 10%. This will be driven by growth initiatives like addition of more salesmen, new product offerings, geographic expansion, and logistical, productivity improvements as well as continued consolidation of the North American HVAC industry.

Zacks Rank

Watsco currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry include AAON, Inc. (NASDAQ:AAON) and Comfort Systems USA, Inc. (NYSE:FIX) .

AAON, Inc. has delivered an average positive earnings surprise of 6.67% in the last four quarters and carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Comfort Systems, which also carries a Zacks Rank #2, has an average positive earnings surprise of 15.83% in the last four quarters.

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