Friday, October 17, 2008
(Cont'd from above)...

This is another company that does a very mundane business and does it well. WSO is the largest distributor of heating, ventilation and air conditioning (i.e., HVAC) equipment, and also parts, in the country. Essentially, it's a residential HVAC arms dealer... and it's become cheap... not based on its price-to-earnings multiple... Remember, we cannot trust P/E multiples in this environment anymore because, with a big recession coming, we know the estimates are often too high...

This one's cheap based on its 4.8% yield...

We know the HVAC business is very much tied in with housing... so WSO is a stock to own while we wait for housing to bottom. Now, remember, we think it bottoms next year. We think it's only 257 days away... I still think we'll get there, even though I hated the fact that mortgage rates spiked terribly this week... terribly... and we still need some homebuilders... sell, sell, sell... to go out of business... We're still pumping out 700,000 homes. We don't need them!

This company, WSO, is paying you to wait for the bottom (i.e., with its dividend), and it should also do better, because of lower raw material costs, courtesy of the commodity collapse. Plus, we know that United Technologies (UTX)'s HVAC business, Carrier, was flat last quarter, when it really should have been much worse. Since WSO... and we're going to do a little extrapolation here from our work on UTX... since WSO is one of Carrier's distributors... good news... or, at least, not bad news... for UTX's Carrier division, is also good news for WSO.


Yesterday, WSO reported a quarter that missed the Street's earnings by seven cents, but was really much better than it should have been, given the awful state of the housing market right now...

WSO didn't miss the numbers because business was bad. It missed because its revenues came in $25 million lighter than expected, due to cooler weather and hurricane disruptions. It actually would have done a good quarter... I mean, a quarter that might have beaten expectations...

WSO did lower its full-year earnings guidance from $2.34 to $2.40... down to $2.22 to $2.26... but, frankly, they should have been doing much worse, but they aren't.

I know that sounds like a thin read to hang on but, remember, we're trying to find stocks that we can be in and get paid to wait until things get better.

WSO's margins were up by about 100 basis points... or one percentage point... because of better pricing and sales of higher-efficiency HVAC systems. WSO also continued its cost-cutting program, which has given the company $25 million in savings to date, and should bring in another $8-$12 million over the next couple of quarters.

WSO is using the lean years to make itself a leaner company...

This worst-than-expected, but much better than it should have been, quarter is why Piper Jaffrey, and Key Bank, upgraded WSO. They did it this morning... and the great thing is, it barely budged, because of the crummy close in the market...

That's your opportunity...

Two major firms upgrade, and the stock do anything. I like that. That's an opportunity...

WSO fits right into our high-yield theme... We are not buying this one for near-term earnings, okay... We do think housing will bottom, causing business to pick up in nine months... and, since WSO gets 80% of its revenues from replacement parts, it should have any trouble generating cash for its dividend while we're waiting for housing to bottom.

That's right... Again, we're being paid to wait for a turn. You are not being paid to wait for a turn in any of the homebuilders. All of their dividends don't amount to a hill of beans. You need a company with a good dividend while you're paid to wait.

WSO's operating cash flow is expected to come in at about $3 per share... That's more than enough to cover the $1.80 per share it needs to keep up with its dividend payments. Remember, we care about the cash flow, because that's how much they can give back to you.

Let's not forget... WSO could very well raise its dividend. The last time it did that was three quarters ago. It was a 12.5% increase, from 40 cents to 45 cents. If WSO gives us another 12.5% dividend increase, and the stock stands still, its yield will go to 5.3%. Now that would be something you could bank on.

I wouldn't reach to buy the stock, given that it went up slightly on a terrible day for the Dow. Had it not been recommended, I think it would have been down a buck. Although, given its already high dividend, it wouldn't be crazy to put on 50 shares now if you intend to buy 200 total...

You need to approach WSO the same way we've approached other high yielders in this market. You buy it on a scale down, based on its rising yield...

Right now, with the stock at $37.27, WSO yields 4.8%... much better than treasuries... much better than most bonds. I think you can get it for less...

When WSO hits $36... and I think it could, given how treacherous this market is... it will be supporting a 5% yield, and that would be a really great buying opportunity...

And then I'd wait for it to go still lower, to $32.70. That's 5.5%... before you buy your next leg of stocks. That's how you play high-yielding stocks in this environment.

Bottom line...

The Bottom Line!:   Watsco Inc. (WSO) is paying you to wait for a housing bottom. Let this high-yielder come to you. Don't pay up, and I think this one could work.

Read Jim's next Segment here