Watsco Inc. WSO reported record first-quarter 2016 earnings per share of 71 cents, which increased 9% year over year, driven by consistent growth in both residential and commercial markets, with continued strength in sales of high-efficiency replacement systems. Earnings, however, lagged the Zacks Consensus Estimate of 73 cents.Total revenue in the quarter rose 5% year over year to a record $851 million, surpassing the Zacks Consensus Estimate of $843.3 million. Sales of HVAC (heating, ventilating and air conditioning) increased 7%; other HVAC products grew 4% and commercial refrigeration products increased 6%.Watsco Inc. (WSO) Street EPS & Surprise Percent - Last 5 Quarters | FindTheCompanyShares of Watsco inched up 0.8% yesterday after the company reported record results for the first quarter on Apr 20.Cost and MarginsCost of sales increased 5.7% year over year to $639 million. Gross profit grew 4% year over year to $212 million while gross margin decreased 20 basis points (bps) from the year-ago quarter to 25%.Selling, general and administrative expenses rose 2.9% year over year to $161.8 million. Income from operations increased 7.8% year over year to a record $50.7 million. Operating margin expanded 20 bps from the prior-year quarter to 6%.Financial OperationsWatsco had cash and cash equivalents of $32.9 million at the end of first-quarter 2016 compared with $35 million at 2015 end. The company recorded cash flow from operations of $41.9 million in the reported quarter as against cash usage of $16.8 million in the prior-year period.Watsco announced a 21% increase in its annual dividend to $3.40 per share, which came into effect from Jan 2016.Our TakeWatsco’s digital initiatives are centered on investments in scalable platforms for mobile apps, eCommerce, business intelligence and supply chain optimization. The company’s strategic goals will help to further strengthen its leadership position, accelerate sales and profit growth, increase the speed and convenience of serving customers, and extend its reach to new geographies and sales channels.Watsco has immense potential in the replacement market given an aging stock of air conditioners and heating systems in the U.S. The company will benefit from expansion of its product offering as well as logistical and productivity improvements. Dividend hikes and share repurchases will be accretive to earnings. However, foreign currency headwinds, seasonal factors and lack of acquisitions will weigh on Watsco’s results.Zacks RankWatsco currently has a Zacks Rank #3 (Hold).Some better-ranked stocks in the sector worth considering are AAON Inc. AAON, KB Home KBH and Masco Corporation MAS. While AAON Inc. sports a Zacks Rank #1 (Strong Buy), KB Home and Masco Corporation carry a Zacks Rank #2 (Buy).Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >> Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report MASCO (MAS): Free Stock Analysis Report WATSCO INC (WSO): Free Stock Analysis Report AAON INC (AAON): Free Stock Analysis Report KB HOME (KBH): Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research