- Price
- $299.50
- Fair value
- $433.00
- Discount
- 30.8%
- Uncertainty
- Medium
- LSEG rating
- 2.93
- Moat
- Narrow
- Next earnings
- 2026-10-27
- Next earnings is estimate
- No
- Company name
- Watsco
- Sector
- HVAC distribution
- About
- Watsco is the largest distributor of heating, ventilation and air conditioning (HVAC) equipment in North America. It buys equipment, parts and supplies from manufacturers and sells them to contractors, who install and repair systems in homes and buildings. It has about 650 locations in the United States and more in Canada and other countries. HVAC equipment gave 68% of sales in Q2 2026, other HVAC products 28%, and commercial refrigeration 4%. Most of its sales replace old systems in existing homes, so demand depends more on hot weather and on homeowners than on new construction. Carrier is its largest supplier, with 64% of purchases in Q2 2026, and Carrier owns minority stakes in Watsco's Carrier Enterprise joint ventures. Watsco grows by buying smaller distributors, and it sells more and more through its own e-commerce and mobile apps.
- Thesis
- The market prices Watsco for lower profits after two strong years. In 2025, equipment makers raised prices sharply for inflation and tariffs, and the change to new A2L refrigerants also helped margins. In 2026, these price increases returned to normal. In Q2 2026, gross margin fell to 27.5% from 29.3%, operating income fell 12%, and EPS fell 12% to $4.00. Commercial equipment sales fell 8%. Investors doubt that unit growth can make up for the lower margins. For the gap to close, Watsco must show that profit has stopped falling. Gross margin must stay near the level of the last 12 months, residential unit volume must keep growing, and operating income must grow from a year earlier by early 2027. The Jackson Supply and Granite Group purchases, which together add about $730 million of yearly sales, must also add to earnings. The first test is the Q3 2026 report on October 27, 2026. The Q4 report in early 2027 and the price increases of the equipment makers for 2027 give the next tests. If margins hold and volume grows, the gap can close over the next four to six quarters.
- Risks
- Gross margin depends on the price increases of equipment makers. These increases were large in 2025 and returned to normal in 2026. If prices stay flat or fall while costs rise, profit can fall more.
Demand depends on homeowners who replace old systems and on new home building. High interest rates and weak consumers can delay replacements or move them to repairs. Commercial equipment sales fell 8% in Q2 2026.
Carrier supplied 64% of Watsco's purchases in Q2 2026 and owns stakes in its main joint ventures. A change in Carrier's strategy, prices or products affects Watsco directly.
Granite Group adds plumbing products in the Northeast, a new product line and region for Watsco. Tariffs on metals and imported parts can also raise equipment prices and slow demand.
- Balance sheet
- Cash: $464M
Debt: $0.0M
Net cash: $464M
Undrawn credit line: $600M, to March 2028
Watsco has no debt. At June 30, 2026, it had $364.2 million of cash, of which $108.8 million was held by foreign subsidiaries, and a $100.0 million certificate of deposit that matured in September 2026. The figures do not include operating leases on its locations. The $600 million unsecured revolving credit facility, due March 16, 2028, had nothing drawn at June 30, 2026, and Watsco can cut it to $500 million from October to March. After the balance sheet date, on October 9, 2026, Watsco paid 80% of the $505.0 million price of Granite Group in cash, about $404 million, and the rest in shares. This used most of the June 30 cash, so Watsco can draw on the revolving credit facility for working capital, and the Q3 2026 report shows any borrowing. Cash used in operations was $21 million in the first half of 2026, because of the normal build of inventory before summer. In April 2026, Watsco raised its yearly dividend to $13.20 per share. It can also sell new shares under its at-the-market program.
As of 2026-06-30.
- Checkpoints
- Oct 27, 2026: Q3 2026 results: gross margin and unit volume. Pending. Watch: Gross margin near 27.5% or higher with growth in residential unit volume passes; gross margin clearly below 27% or a fall in residential unit volume fails.
Feb 2027 (estimate): Q4 2026 results and first Granite Group quarter. Pending. Watch: Operating income that grows from a year earlier with Granite Group added passes; another fall in operating income fails.
Q2 2027 (estimate): 2027 equipment price increases and selling season. Pending. Watch: Price increases near the historical trend with stable gross margin in Q1 and Q2 2027 pass; flat prices with lower margin fail.
- Recent events
- 2026-10-09: Watsco closed the purchase of Granite Group, a distributor of plumbing and HVAC products in seven Northeast states with about $500 million of yearly sales. It paid $505.0 million, 80% in cash and 20% in 338,176 new Watsco shares. On the same day, Watsco said it will report Q3 2026 results before the market opens on October 27, 2026.
2026-09-12: Watsco agreed to buy Granite Group for $505.0 million, subject to an adjustment after closing.
2026-07-29: Watsco reported Q2 2026 results. Revenue grew 2% to $2.1 billion, but gross margin fell to 27.5% from 29.3%, and EPS fell 12% to $4.00. Domestic residential HVAC equipment sales grew 5%, with 2% more units. E-commerce sales grew 13% in the first half of 2026.
2026-06-01: Watsco closed the purchase of Jackson Supply, a Sunbelt HVAC distributor with about $230 million of yearly sales and 25 locations. It paid with 517,884 new Watsco shares.
2026-04-28: Watsco reported Q1 2026 results. Revenue was flat at $1.53 billion, and EPS fell 3% to $1.87. Watsco also agreed to buy Jackson Supply. In April 2026, Watsco raised its yearly dividend by 10% to $13.20 per share.