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1. Company Snapshot

1.a. Company Description

Watsco, Inc., together with its subsidiaries, distributes air conditioning, heating, refrigeration equipment, and related parts and supplies.The company distributes equipment comprising residential ducted and ductless air conditioners, such as gas, electric, and oil furnaces; commercial air conditioning and heating equipment systems; and other specialized equipment.It also offers parts, including replacement compressors, evaporator coils, motors, and other component parts; and supplies, such as thermostats, insulation materials, refrigerants, ductworks, grills, registers, sheet metals, tools, copper tubing, concrete pads, tapes, adhesives, and other ancillary supplies, as well as plumbing and bathroom remodeling supplies.


The company serves contractors and dealers that service the replacement and new construction markets for residential and light commercial central air conditioning, heating, and refrigeration systems.As of December 31, 2021, it operated from 671 locations in the United States, Canada, Mexico, and Puerto Rico, as well as exports its products to Latin America and the Caribbean Basin.Watsco, Inc.


was founded in 1945 and is headquartered in Miami, Florida.

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1.b. Last Insights on WSO

Watsco, Inc.'s recent performance has been driven by a series of positive developments. Institutional investors have been increasing their stakes in the company, with notable purchases by Donaldson Capital Management LLC, which boosted its holdings by 47.7%, and Federated Hermes Inc., which acquired 17,013 shares, a 577.9% increase. Additionally, the company has scheduled a conference call to discuss its 2025 fourth quarter performance and annual results, providing investors with valuable insights into its financial stability and growth prospects.

1.c. Company Highlights

2. Watsco's Earnings Report: A Strong Performance Amidst Industry Challenges

Watsco's fourth-quarter financial performance was marked by double-digit pricing gains on new A2L products, resulting in a 40-basis-point increase in gross margins to 27.1%. However, unit volumes declined due to a strong 20% comparison unit growth rate last year. The company's EPS came in at $1.68, missing estimates of $1.94. Revenue growth was robust, driven by the acquisition of 12 businesses, representing over $1.6 billion in sales. The company's operating efficiency improved as SG&A dropped 2%. With a debt-free balance sheet, Watsco generated record fourth-quarter cash flow of $400 million.

Publication Date: Feb -20

📋 Highlights
  • A2L Transition & Market Share Growth:: Navigated A2L refrigerant shift, acquiring 12 businesses for $1.6B in sales, boosting scale and market share.
  • Dividend Increase & Cash Flow:: Raised annual dividend 10% to $13.20 (52nd consecutive year) and generated $400M record Q4 cash flow.
  • Gross Margin Expansion:: Q4 gross margin rose 40 bps to 27.1% via pricing power, VCR initiative, and SG&A efficiency (2% decline).
  • E-Commerce & Technology:: E-commerce now 35% of sales, with OnCallAir GMV up 20% and 73,000 mobile app users driving adoption.
  • Inventory & Balance Sheet:: Met $500M inventory reduction goal, maintained debt-free status in 2025, and improved operating efficiency.

Operational Highlights

The company continued to invest in innovation and technology, with its e-commerce platform accounting for 35% of sales. The mobile app has 73,000 users, and the OnCallAir platform saw a 20% increase in gross merchandise value. Watsco's focus on modernizing its people, teams, systems, processes, and technology is expected to drive efficiencies and improve its business.

Guidance and Outlook

Looking forward, Watsco expects margins to gradually improve as the A2L product transition matures. Analysts estimate next year's revenue growth at 4.9%. The company's CEO, Albert Nahmad, expressed optimism about a simpler operating environment this year, but acknowledged that macroeconomic and geopolitical factors are beyond their control.

Valuation

Watsco's current valuation metrics are as follows: P/E Ratio of 31.25, P/B Ratio of 4.82, P/S Ratio of 2.3, EV/EBITDA of 22.85, Dividend Yield of 2.93%, and Free Cash Flow Yield of 3.22%. The company's ROE stands at 17.34%, and ROIC at 14.92%. With a net debt-to-EBITDA ratio of 0.52, Watsco's balance sheet remains healthy. The dividend increase to $13.20, marking the 52nd consecutive year of paying dividends, is a positive indicator of the company's commitment to returning value to shareholders.

3. NewsRoom

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Watsco, Inc. (WSO) Q4 2025 Earnings Call Transcript

Feb -17

Source: seekingalpha.com

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Watsco (WSO) Lags Q4 Earnings and Revenue Estimates

Feb -17

Source: zacks.com

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Watsco Reports Record Full-Year Gross Margin, Meets Inventory Reduction Target and Generates Record 4th Quarter Cash Flow in Challenging Market Conditions

Feb -17

Source: globenewswire.com

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Watsco Boosts Annual Dividend 10% to $13.20 Per Share

Feb -17

Source: globenewswire.com

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Heartland Opportunistic Value Equity Strategy Q4 2025 Portfolio Activity

Feb -13

Source: seekingalpha.com

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Stay Ahead of the Game With Watsco (WSO) Q4 Earnings: Wall Street's Insights on Key Metrics

Feb -11

Source: zacks.com

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Federated Hermes Inc. Acquires 17,013 Shares of Watsco, Inc. $WSO

Feb -02

Source: defenseworld.net

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Watsco, Inc. $WSO Shares Bought by Donaldson Capital Management LLC

Feb -01

Source: defenseworld.net

4. Business Breakdown

4.a. Revenues by Country

4.b. Revenues by Segment

5. Expected revenues mid-term growth (6.46%)

6. Segments

HVAC Equipment

Expected Growth: 6.5%

Watsco's HVAC equipment segment growth of 6.5% is driven by increasing demand for energy-efficient systems, rising construction activities, and growing replacement demand from aging infrastructure. Additionally, the company's focus on e-commerce, digital marketing, and strategic acquisitions have expanded its customer base and improved operational efficiency.

Other HVAC Products

Expected Growth: 6.2%

Watsco's Other HVAC Products segment growth of 6.2% is driven by increasing demand for energy-efficient solutions, rising HVAC replacements, and growing construction activities. Additionally, the company's focus on e-commerce, digital marketing, and strategic acquisitions have expanded its customer base and improved product offerings, contributing to the segment's growth.

Commercial Refrigeration Products

Expected Growth: 7.5%

Watsco's commercial refrigeration products segment growth is driven by increasing demand for energy-efficient solutions, rising adoption of natural refrigerants, and growing need for refrigeration in the foodservice and retail industries. Additionally, the company's strategic acquisitions, expanded product offerings, and strong distribution network contribute to its 7.5% growth.

7. Detailed Products

HVAC (Heating, Ventilation, and Air Conditioning) equipment

Watsco, Inc. sells a wide range of HVAC equipment, including air conditioners, heat pumps, furnaces, and boilers, from top brands like Carrier, Rheem, and Trane.

Refrigeration solutions

Watsco offers refrigeration products, including walk-in coolers, refrigerated display cases, and ice machines, designed for supermarkets, restaurants, and convenience stores.

HVAC parts and supplies

Watsco distributes a broad range of HVAC parts and supplies, including compressors, coils, and thermostats, from leading manufacturers.

Air purification and indoor air quality solutions

Watsco offers air purification systems and indoor air quality solutions, designed to improve indoor air quality and reduce airborne contaminants.

8. Watsco, Inc.'s Porter Forces

Forces Ranking

Threat Of Substitutes

Watsco, Inc. operates in the HVAC industry, which has a moderate threat of substitutes. While there are alternative heating and cooling systems available, they are not always suitable substitutes for Watsco's products.

Bargaining Power Of Customers

Watsco, Inc. has a large customer base, which reduces the bargaining power of individual customers. Additionally, the company's products are often essential for its customers' operations, making it difficult for customers to negotiate prices.

Bargaining Power Of Suppliers

Watsco, Inc. relies on a few large suppliers for its raw materials, which gives them some bargaining power. However, the company's large scale of operations and long-term contracts help to mitigate this risk.

Threat Of New Entrants

The HVAC industry has high barriers to entry, including significant capital requirements and regulatory hurdles. This makes it difficult for new entrants to compete with established players like Watsco, Inc.

Intensity Of Rivalry

The HVAC industry is highly competitive, with several large players competing for market share. Watsco, Inc. faces intense competition from companies like Carrier Global Corporation and Lennox International Inc.

9. SWOT Analysis

Strength

Weaknesses

Opportunities

Threats

10. Capital Structure

10.a. Balance Sheet

10.b. Weighted Average Cost of capital

Value
Debt Weight 4.93%
Debt Cost 3.95%
Equity Weight 95.07%
Equity Cost 8.16%
WACC 7.95%
Leverage 5.19%

11. Quality Control: Watsco, Inc. passed 8 out of 9 key points

12.a Historical Valuation

12.b Price/Earnings Ratio

12.c Margin Valuation

12.d Peers Valuation

Peers Group Analysis

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MSC Industrial Direct Co

A-Score: 6.0/10

Value: 4.0

Growth: 3.7

Quality: 6.0

Yield: 8.0

Momentum: 6.0

Volatility: 8.3

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Applied Industrial Technologies

A-Score: 5.3/10

Value: 3.1

Growth: 7.1

Quality: 7.2

Yield: 2.0

Momentum: 4.5

Volatility: 8.0

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Watsco

A-Score: 5.2/10

Value: 3.1

Growth: 6.8

Quality: 7.1

Yield: 6.0

Momentum: 1.0

Volatility: 7.3

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WESCO

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Value: 4.5

Growth: 7.8

Quality: 3.9

Yield: 1.0

Momentum: 8.0

Volatility: 5.0

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Pool

A-Score: 4.7/10

Value: 3.6

Growth: 6.8

Quality: 6.1

Yield: 3.0

Momentum: 1.5

Volatility: 7.0

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Core & Main

A-Score: 4.6/10

Value: 3.6

Growth: 8.4

Quality: 5.4

Yield: 0.0

Momentum: 5.0

Volatility: 5.0

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Peers Metrics

12.e Scoring Insights

12.f DCF BETA

Parameters

Short Term Growth

Short term Time

Long-Term Growth

WACC

Target Price

411.71$

Current Price

411.71$

Potential

-0.00%

Expected Cash-Flows