Amid significant tailwinds in the heating, ventilation, and air-conditioning or HVAC industry, one company looks poised for market-beating returns.

In the developed world, we've grown accustomed to heating and cooling, and we rely upon these systems to keep us comfortable year-round. Now that the housing market's booming, HVAC companies will likely have a better chance to sell more units in new homes.

As the economy improves, existing homeowners who put off upgrading their HVAC equipment will be more likely and able to buy new units. Furthermore, as emerging countries gain wealth and improve infrastructure, they'll probably buy and install more HVAC units for their buildings, too.


A successful HVAC distribution company with great growth potential
An excellent way to profit from these tailwinds is by investing in Watsco . Watsco is a leading distributor of HVAC equipment, with more than 570 locations in the U.S., Canada, Mexico, and Puerto Rico. Watsco also exports products to Latin America and the Caribbean.

Watsco's 2012 financial results were excellent. Its revenue increased by 15% to $3.4 billion, and its net income increased by 14% to $103 million.Its latest quarterly earnings report was positive as well, resulting in a 29% increase in earnings per share year over year.

Watsco's current P/E of 24.5 is in the same ballpark as its competitor Lennox International , whose P/E is 23.8. Lennox is a manufacturer of HVAC equipment and components, and will also benefit from HVAC industry tailwinds.

However, Lennox's revenue and net income have both declined over the last five years, while Watsco's revenue doubled, and its net income rose 72%. Watsco is a distributor, not a manufacturer, and it focuses strictly on sales, instead of being concerned with the manufacturing challenges that now face Lennox.

Watsco has a long history of boosting its dividend. Over the last decade the company has increased its quarterly payout by a factor of 20, from $0.03 per share in 2002 to $0.62 per share in 2012. In December 2012, Watsco also elected to pay a special dividend of $5.00 per share, owing partly to dividend tax changes that were projected to go into effect in 2013.

As a result of this massive special payout, Watsco reduced its quarterly dividend to $0.25 per share, which equates to a 1.1% yield. Watsco will more than likely resume its dividend growth beginning in 2014. 

A very effective partnership
In 2009, Watsco made a very important acquisition, by purchasing a 60% stake in a joint venture with Carrier, a subsidiary of United Technologies . This joint venture, known as Carrier Enterprise, was Watsco's largest acquisition and made Watsco the sole distributor for Carrier, Bryant, and Payne products in specified areas.

United Technologies, a diversified blue chip, would not trust just any company to be a distributor for Carrier, the market-leading provider of HVAC equipment. Indeed, it seems pleased with Watsco's performance, since the U.S. joint venture was later expanded to Canada and Mexico, creating a new international growth opportunity for Watsco.

Carrier represents 22.5% of United Technologies' overall sales; the company also provides elevator, security, controls, and a wide variety of aerospace products and systems. Its diverse mix of businesses makes it a compelling investment, but while it will benefit significantly from the HVAC tailwinds mentioned above, it's not as pure a play on the industry as Watsco.

"Buy and build", a business model that works
Watsco has grown by utilizing a "buy and build" strategy in which it acquires smaller competitors and increases their capabilities by enhancing their product offerings and adding new distribution locations. Watsco has used this strategy to complete 59 successful acquisitions since 1989.

Watsco's plan is to continue the same successful "buy and build" business model that has served it so well in the past. In other words, if it is not broke don't fix it. Even after Watsco's tremendous growth in the HVAC distribution market, it still only represents 10% of the overall market,which leaves plenty of room to continue its "buy and build" strategy.

Watsco currently has an even greater opportunity for growth by implementing its "buy and build" strategy in international markets. International sales represent 16% of Watsco's overall sales,and this number should grow in upcoming years. Watsco now has decades of experience with the implementation of this strategy in the U.S., and this experience should pay dividends (literally) in its efforts to incorporate a similar strategy in the international marketplace.

Another opportunity for its "buy and build" strategy is the joint venture with Carrier. Watsco should get the opportunity to expand this joint venture by acquiring additional distribution areas from Carrier, and building the business at each new area.

Foolish bottom line
I believe that Watsco is the best at what it does and that its future is very bright. I recommend that investors consider a position in Watsco as part of their diversified portfolio.

Another promising pick for your portfolio
The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.

The article Beat the Market Comfortably by Investing in HVAC originally appeared on Fool.com.

Greg Williamson owns shares of United Technologies and Watsco. The Motley Fool recommends Watsco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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