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what it is
Watsco is the middleman that gets air conditioners, furnaces, and HVAC parts to contractors when your house or business needs them fast.
how it gets paid
Last year Watsco made $7.2B in revenue. HVAC equipment was the main engine at $4.90B, or 68% of sales.
why growth slowed
Revenue fell 5.0% last year. Revenues declined 10%, to $1.58 billion, as hvac equipment sales fell 13% following last year’s surge tied to sales of legacy 410a systems ahead of.
what just happened
Q4 EPS of $1.68 missed the $2.02 estimate as revenue fell 10% to $1.58B.
At a glance
A balance sheet — strong enough to weather a downturn
75/100 earnings predictability — reasonably predictable
33.5x trailing p/e — you're paying up for this one
3.4% dividend yield — cash in your pocket every quarter
19.5% return on capital — nothing to write home about
xvary composite: 60/100 — average
What they do
Watsco is the middleman that gets air conditioners, furnaces, and HVAC parts to contractors when your house or business needs them fast.
Watsco sits between HVAC manufacturers and contractors who cannot wait a week when your AC dies in July. That urgency matters. It helps produce a 13.0% operating margin and a 19.5% return on capital (profit earned on each dollar invested in the business), so what: this distributor has pricing power most distributors never get.
How they make money
$7.2B
annual revenue · their business grew -5.0% last year
HVAC equipment
$4.90B
13.0%
Parts, supplies & refrigeration
$1.51B
5.0%
Commercial AC & heating systems
$0.58B
5.0%
Specialized & other equipment
$0.21B
+11.0%
The products that matter
distributes heating and cooling systems
HVAC Equipment
$3.6B · core revenue driver
this is the big-ticket bucket. It carries the most exposure to housing, construction, and replacement timing. When customers defer installs, this line feels it first.
core driver
sells repair parts and contractor supplies
Parts & Supplies
$2.9B · steadier demand
this is the less dramatic side of the story. Systems still need filters, components, and repairs even when customers put off a full replacement.
steadier mix
Key numbers
33.5x
trailing p/e
P/E (price-to-earnings ratio) means how much you pay for each dollar of profit, so what: you are paying a premium price for a company with projected sales growth of 4.0%.
19.5%
return on capital
Return on capital means profit earned on money invested in the business, so what: Watsco turns a plain distribution job into a very profitable one.
$11M
long-term debt
That is effectively no debt for a company with a roughly $17B market cap, so what: the balance sheet gives management room if the cycle weakens.
3.4%
dividend yield
Yield means the cash payout you collect while you wait, so what: Watsco pays you more than many industrial names even with the stock near all-time premium territory.
Financial health
A
strength
- balance sheet grade A — very strong financial position
- risk rank 3 — safer than 50% of stocks
- price stability 70 / 100
- long-term debt $11M (0% of capital)
- net profit margin 9.0% — keeps 9 cents of every dollar in revenue
- return on equity 20% — $0.20 profit for every $1 investors have put in
A — among the top-rated companies for balance sheet quality.
Total return vs. market
You invested $10,000 in WSO 3 years ago → it's now worth $14,400.
The index would have given you $14,540.
source: institutional data · total return
What just happened
missed estimates
Q4 EPS of $1.68 missed the $2.02 estimate as revenue fell 10% to $1.58B.
HVAC equipment sales fell 13% after the prior year's replacement surge. Newer, more expensive systems lifted average selling prices 11% and pushed gross margin up 40 basis points, or 0.40 percentage points, to 27.1%.
$1.58B
revenue
$1.68
eps
27.1%
gross margin
the number that mattered
The 11% jump in average selling prices mattered most because it kept margin improving even while revenue and unit demand went backward.
-
watsco will be glad to have 2025 in the rearview mirror.the recent fourth quarter, in particular, reflected the final stages of a regulatory-driven product transition and a difficult comparison to a strong prior-year period.
-
revenues declined 10%, to $1.58 billion, as hvac equipment sales fell 13% following last year’s surge tied to sales of legacy 410a systems ahead of the a2l conversion.
-
the new, more expensive systems helped increase average selling prices by 11%.
-
the gross margin benefited, too, expanding 40 basis points, to 27.1%.
-
selling, general, and administrative expenses declined 2%, though operating income fell 25%, to just over $100 million.the company ended the year essentially debt-free, while completing a sizable inventory reduction.
source: company earnings report, 2026
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What could go wrong
the key risk is simple: WSO is priced for a rebound before the operating numbers have fully confirmed one.
med
replacement timing can slip longer than the market expects
Last year's 5.0% revenue decline already showed you the business is not immune to slower housing and renovation activity. Customers do not stop needing HVAC systems. They do postpone the purchase if the budget is tight.
That matters because a distributor with a 7.3% net margin does not have endless room to absorb weak volume.
med
price did more of the work than units did
Average selling prices rose 11%, while fourth-quarter HVAC equipment sales fell 13%. That's a useful short-term cushion. It is not the same thing as broad demand recovery.
If pricing settles down before volume comes back, earnings can flatten faster than the multiple suggests.
med
33.5x earnings leaves very little room for another soft stretch
WSO trades at 33.5x trailing earnings and roughly 32x estimated FY2026 earnings. Those are generous terms for a business with recent negative sales growth and a 16.5% return on capital.
The business does not need to break for the stock to disappoint. It just needs to look ordinary for longer.
med
institutions still are not treating this like an obvious dip-buy
Net institutional selling has lasted three straight quarters, with 258 buyers versus 349 sellers in 4q2025. That's not panic. It is a vote of caution from investors who usually do not mind waiting.
If that selling extends into a fourth quarter, multiple compression becomes easier to imagine than re-rating.
A clean balance sheet lowers solvency risk. It does not remove valuation risk. If revenue stays soft and gross margin gives back the recent improvement, the stock has more downside room than the dividend yield covers.
source: institutional data · regulatory filings · risk analysis
Pay attention to
metric
revenue growth finally turning positive
Last year sales fell 5.0%. The stock is already priced as if that was the dip, not the trend. You want the revenue line to agree.
calendar
next earnings release
Here's what you should know right now: one quarter of cleaner numbers would help. Two would start to make 33.5x earnings easier to explain.
trend
equipment demand vs. price
Average selling prices rose 11%, but fourth-quarter HVAC equipment sales fell 13%. You want volume doing some work again, not just price mix.
risk
institutional selling streak
Net selling has lasted three straight quarters. If that becomes four, the market is still treating this as expensive, not misunderstood.
Analyst rankings
short-term outlook
below average
momentum score 4 — in human-speak, analysts think this could lag most stocks over the next 6–12 months.
risk profile
average
stability score 3 — this is not especially dangerous, but it is not a bunker stock either.
chart momentum
below average
technical score 4 — the tape has been less convincing than the business quality.
earnings predictability
75 / 100
the business is usually understandable. The argument is price versus cycle, not whether the model exists.
source: institutional data
Institutional activity
institutions have been net selling for 3 consecutive quarters — 258 buyers vs. 349 sellers in 4q2025. total institutional holdings: 38.1M shares. net selling for 3 quarters.
source: institutional data
Price targets
3-5 year target range
$329
$672
$411
current price
$501
target midpoint · +22% from current · 3-5yr high: $695 (+70% · 16% ann'l return)
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