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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 Q3 Earnings: A Beat on Cash Flow Amidst a Challenging Market

Watsco's third quarter sales declined 4% in total and 3% in the U.S., but the company achieved double-digit pricing gains on new products, with gross margins expanding 130 basis-points to 27.5%. The earnings per share (EPS) came in at $3.98, missing the estimated $4.44. Despite the revenue decline, the company generated record third quarter cash flow of $355 million. The company's strong balance sheet is evident, with a net debt to EBITDA ratio of 0.16, indicating a healthy financial position.

Publication Date: Nov -05

📋 Highlights
  • Record Cash Flow:: Generated $355 million in third-quarter cash flow, up from previous periods.
  • Gross Margin Expansion:: Margins increased 130 basis points to 27.5%, driven by pricing gains and cost controls.
  • E-Commerce Growth:: Online sales reached 34% of total revenue, supported by 72,000 mobile app users.
  • Inventory Reduction Target:: Achieved $350 million in reductions toward a $500 million annual goal, improving inventory turns to 3.6-3.7.
  • Product Transition Impact:: 55% of products affected by next-gen equipment and A2L refrigerant shifts, expected to yield long-term benefits.

Operational Highlights

The transition to next-generation equipment and A2L refrigerants, which affected 55% of products sold, is expected to be positive in the long term. The company's investment in innovation and technology is paying off, with e-commerce penetration continuing to grow, accounting for 34% of sales. The number of contractors and technicians engaged with the mobile app stands at 72,000 users. As Albert Nahmad, Chairman and CEO, noted, "the company is investing in innovation and technology to separate itself from competitors."

Guidance and Outlook

For the fourth quarter, Watsco expects a mid-single-digit decline in revenue, with sales being soft, but not as bad as expected. The company is focusing on increasing inventory turns, with a goal of significantly improving this metric. Watsco has already achieved $350 million of its $500 million inventory reduction target in the third quarter. The industry has experienced disruptions over the past few years, including changes in industry standards, refrigerant changes, and the pandemic, making it challenging to achieve normal inventory levels.

Valuation and Growth Prospects

With a P/E Ratio of 24.72 and an EV/EBITDA of 18.91, the market is pricing in a certain level of growth. Analysts estimate next year's revenue growth at 4.7%. The company's strong balance sheet, with a ROE of 19.32% and ROIC of 16.28%, indicates a healthy financial position. The dividend yield of 3.27% and free cash flow yield of 3.61% make the stock attractive to income investors. As Barry S. Logan noted, "the balance sheet is getting stronger, and the company is getting better despite the industry slowdown."

3. NewsRoom

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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

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Bank of New York Mellon Corp Lowers Holdings in Watsco, Inc. $WSO

Feb -01

Source: defenseworld.net

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Watsco Schedules Conference Call to Review 2025 Fourth Quarter Performance and Annual Results

Jan -30

Source: globenewswire.com

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Watsco, Inc. (NYSE:WSO) Receives Average Recommendation of “Hold” from Analysts

Jan -18

Source: defenseworld.net

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Market Today: Chips, energy and housing lead -- TSM, MU, NVO in focus

Jan -16

Source: gurufocus.com

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SG Americas Securities LLC Grows Stake in Watsco, Inc. $WSO

Jan -12

Source: defenseworld.net

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Nisa Investment Advisors LLC Trims Stake in Watsco, Inc. $WSO

Jan -12

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

A-Score: 5.0/10

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

1-Year Total Return ->

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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

414.74$

Current Price

414.74$

Potential

-0.00%

Expected Cash-Flows