Core Viewpoint - Watsco's recent earnings report indicates a decline in both earnings and revenues, raising concerns about the company's performance amidst ongoing market pressures and a downward trend in estimates [2][3][9]. Financial Performance - Watsco reported Q3 2025 earnings of $3.98 per share, missing the Zacks Consensus Estimate of $4.21 and down 6% year over year from $4.22 per share [2]. - Revenues for the quarter were $2.07 billion, falling short of the consensus estimate of $2.11 billion and down 4% year over year [3]. - In the U.S. market, sales decreased by 3%, while non-U.S. revenues saw a decline of 14% [4]. - The HVAC equipment segment, which constitutes 67% of sales, fell by 7%, although there was a 2% rise in non-equipment HVAC products and a 4% growth in commercial refrigeration sales [4]. Margins and Profitability - Gross profit remained stable at $569 million, with gross margin expanding by 130 basis points to a record 27.5%, attributed to effective pricing and product mix optimization [5]. - Operating income declined by 6% to $235 million, with operating margin at 11.4%, slightly down from 11.6% in the prior-year quarter [5]. Balance Sheet and Liquidity - Watsco ended the quarter with $324 million in cash and cash equivalents and $200 million in short-term investments, totaling $524 million in liquidity, with no long-term debt [6]. - Inventory levels decreased to $1.6 billion, reflecting successful working capital normalization efforts, while operating cash flow reached a record $355 million for the quarter [7]. Outlook - The company anticipates continued volatility through early 2026 due to the refrigerant transition but expects efficiency gains as one-time costs subside [8]. - Watsco aims to expand its technology-driven platforms and leverage AI tools to enhance margins and customer engagement, reaffirming its long-term goal of generating operating cash flow exceeding net income [8]. Estimate Revisions - Since the earnings release, there has been a downward trend in estimates revision, with the consensus estimate shifting down by 12.29% [9][12]. - Watsco currently holds a Zacks Rank 5 (Strong Sell), indicating expectations of below-average returns in the coming months [12]. Industry Comparison - Watsco is part of the Zacks Manufacturing - General Industrial industry, where Illinois Tool Works (ITW) has shown a 2.2% gain over the past month, reporting revenues of $4.06 billion, a year-over-year change of +2.3% [13].

Core Insights - Watsco, Inc. is recognized as one of the best dividend stocks to invest in, particularly noted for its performance over the past 52 weeks [1] - UBS has reduced its price target for Watsco to $390 from $425, maintaining a Neutral rating, following mixed Q3 results [2] Group 1: Financial Performance - In Q3 2025, Watsco reported revenue of $2.07 billion, a decrease of 4% year-over-year, while gross profit remained stable at $569 million [2] - Selling, General and Administrative (SG&A) expenses increased by 5% during the same period [2] Group 2: Market Position and Growth - Watsco operates as the largest distributor in the $74 billion North American HVAC/R market, which is characterized by high fragmentation [3] - The company has achieved an 18% compound annual total-shareholder return since entering distribution in 1989, driven by strong organic growth and over 70 acquisitions [3] Group 3: Financial Strength and Investment - Watsco maintains a robust financial position with over $640 million in cash and investments and no debt, enabling continued investment in growth initiatives [4] - The company is focusing on enhancing its technology platforms, which are actively used by more than 72,000 contractors, installers, and technicians [4] Group 4: Technological Advancements - Watsco is advancing AI-driven initiatives aimed at improving customer experience and operational efficiency [5] - The adoption of digital tools and data-driven solutions by contractors positions Watsco to capture additional market share [5]

Core Insights - Watsco's international operations are crucial for assessing its financial strength and growth potential, especially given its global presence [1][2][3] Revenue Performance - The total revenue for Watsco in the quarter was $2.07 billion, reflecting a year-over-year decline of 4.3% [4] - Revenue from Canada was $87.81 million, accounting for 4.3% of total revenue, which was a 13% miss compared to the consensus estimate of $100.93 million [5] - Latin America and the Caribbean generated $90.83 million, representing 4.4% of total revenue, also missing projections by 14.42% compared to the expected $106.13 million [6] Future Projections - Analysts project Watsco's revenues for the ongoing fiscal quarter to be $1.65 billion, a decline of 6.1% from the previous year, with expected contributions from Canada and Latin America at $83.48 million and $86.39 million, respectively [7] - For the full year, total annual revenue is expected to be $7.33 billion, down 3.8% from last year, with Canada and Latin America projected to contribute $360.5 million and $386.91 million, respectively [8] Market Context - The reliance on international markets presents both opportunities and challenges for Watsco, making it essential to monitor international revenue trends for future projections [9][10] - The company's stock has seen a decline of 4.2% over the past four weeks, contrasting with a 0.3% increase in the S&P 500, and a 15.3% decline over the past three months compared to a 6.4% increase in the S&P 500 [13]

Financial Performance - Revenues for the third quarter of 2025 were $2,067.0 million, a decrease of 4% compared to $2,160.0 million in the third quarter of 2024[87]. - Same-store sales for the third quarter of 2025 were $2,048.0 million, down 5% from $2,154.9 million in the same quarter of 2024[88]. - Gross profit for Q3 2025 was $568.9 million, a slight increase of $2.7 million or 0% compared to Q3 2024, with a gross margin improvement of 130 basis points to 27.5%[90]. - Revenues for the nine months ended September 30, 2025, were $5,660.5 million, a decrease of $203.9 million or 3% from $5,864.4 million in the same period of 2024[97]. - Same-store sales for the nine months ended September 30, 2025, were $5,615.3 million, down $231.5 million or 4% from $5,846.8 million in 2024[98]. - Gross profit for the nine months ended September 30, 2025, was $1,602.0 million, an increase of $25.4 million or 2% from $1,576.6 million in 2024, with a gross margin of 28.3%[99]. - Net income attributable to Watsco, Inc. was 7.8% of revenues in the third quarter of 2025, slightly down from 7.9% in the same quarter of 2024[83]. - Net income attributable to Watsco, Inc. decreased by $9.5 million or 6% in Q3 2025 compared to Q3 2024, primarily due to higher expenses and lower interest income[96]. Expenses and Costs - Cost of sales decreased to 72.5% of revenues in the third quarter of 2025, compared to 73.8% in the same quarter of 2024[83]. - Selling, general and administrative expenses rose to 16.6% of revenues in the third quarter of 2025, up from 15.1% in the same quarter of 2024[83]. - Selling, general and administrative expenses rose to $343.7 million in Q3 2025, a 5% increase from $326.4 million in Q3 2024, representing 16.6% of revenues[91]. - Interest income, net for Q3 2025 decreased by $3.0 million or 45% compared to Q3 2024, primarily due to lower cash and short-term investment balances[93]. Company Operations - The company operated 698 locations as of September 30, 2025, an increase from 689 locations a year earlier[86]. - The company acquired four businesses in 2025, including Southern Ice Equipment Distributors, Inc. and Hawkins HVAC Distributors, Inc.[84]. - HVAC equipment sales accounted for 67% of total sales in Q3 2025, down from 70% in Q3 2024, reflecting a 7% decrease[89]. Cash Flow and Working Capital - Net cash provided by operating activities decreased by $224.4 million to $169.8 million for the nine months ended September 30, 2025, compared to $394.2 million in 2024[113]. - Working capital increased to $2,303.8 million as of September 30, 2025, from $2,096.1 million at December 31, 2024, driven by higher inventory and accounts receivable[112]. Financing and Stock Activity - The company maintains an unsecured, five-year $600.0 million revolving credit agreement, with a seasonal borrowing capacity reduced to $500.0 million from October 1 to March 31[117][118]. - As of September 30, 2025, there was no outstanding balance under the revolving credit agreement, and the company was in compliance with all covenants[119]. - During Q1 2024, the company issued and sold 712,000 shares of Common stock under the 2021 ATM Program for net proceeds of $281.8 million, totaling $298.5 million issued under the program[121]. - The company entered into a new ATM Program on May 3, 2024, allowing for an additional $400.0 million in Common stock sales, with the full amount available as of September 30, 2025[122]. - Cash dividends paid per share increased from $7.85 in 2024 to $8.70 in 2025, with a quarterly dividend of $3.00 declared on October 1, 2025[132]. - The company has repurchased a total of 6,370,913 shares of common stock at a cost of $114.4 million since the inception of the repurchase program, with 1,129,087 shares remaining authorized for repurchase[135]. Acquisitions - The company acquired Southern Ice Equipment Distributors, Inc. for $14.3 million in cash and 7,400 shares of Common stock, recognizing $7.8 million in goodwill[127]. - The acquisition of Hawkins HVAC Distributors, Inc. was completed for $2.5 million in cash, resulting in $0.3 million in goodwill[128]. - The company acquired W.L. Lashley & Associates, Inc. for $3.7 million in cash and 1,036 shares of Common stock, recognizing $3.1 million in goodwill[129]. Strategic Focus - The company has a focus on high-efficiency HVAC systems, which are expected to reduce CO2e emissions significantly[77]. - The U.S. Inflation Reduction Act of 2022 aimed to promote high-efficiency heat pump systems, but tax credits for HVAC systems will be unavailable after December 31, 2025[78]. - The company continues to evaluate potential acquisitions and joint ventures, indicating a strong financial position to pursue additional financing if needed[131].

Core Insights - SouthernSun Asset Management's "SMID Cap Strategy" reported an 8.15% gross return and 7.96% net return for Q3 2025, underperforming the Russell 2500's 9.00% return and the Russell 2500® Value index's 8.17% gain during the same period [1] - Over the trailing twelve months, the composite returned 2.55% gross and 1.86% net, significantly lower than the Russell 2500's 10.16% and the Russell 2500® Value index's 9.00% returns [1] Company Analysis: Watsco, Inc. (NYSE:WSO) - Watsco, Inc. is the largest distributor of HVAC/R products in North America, but its stock experienced a -9.61% return over the last month and a 30.67% decline over the past 52 weeks, closing at $358.33 with a market cap of $14.573 billion on November 4, 2025 [2][3] - In Q2 2025, Watsco's revenue decreased by 4% while operating income increased by 1%, with equipment volumes down approximately 12% year-to-date due to lower new construction activity and a consumer shift from replacement to repair [3] - Despite current challenges, Watsco maintains a stable market share, has no debt, and holds $293 million in cash and short-term investments, positioning the company well for acquisitions in the $74 billion North American HVAC/R distribution market [3] - The company is viewed as having a strong competitive position and a long runway for both organic and inorganic growth, supported by its owner-oriented culture and competitive advantages that increase with scale [3] Hedge Fund Interest - Watsco, Inc. was held by 34 hedge fund portfolios at the end of Q2 2025, a slight decrease from 35 in the previous quarter, indicating a stable but cautious interest among hedge funds [4] - While Watsco is recognized for its potential, certain AI stocks are considered to offer greater upside potential with less downside risk, suggesting a competitive investment landscape [4]

Group 1 - Watsco is recognized as the largest player in a fragmented industry, showcasing strong industry positioning [1] - The company benefits from exceptional leadership and a unique incentive structure that fosters entrepreneurialism at the management level [1] - The investment focus is on value-oriented stocks that are available at low prices and have near-term catalysts for growth [1] Group 2 - The investment horizon for potential opportunities ranges from one quarter to two years, indicating a medium-term investment strategy [1] - The analyst has over three years of active investing experience, including roles as a buy-side analyst at boutique research firms and family offices [1]

Group 1 - Watsco is recognized as the largest player in a fragmented industry, showcasing strong industry positioning [1] - The company benefits from phenomenal leadership and a unique incentive structure that fosters entrepreneurialism at the grassroots management level [1] - The investment focus is on value-oriented stocks that are available at a low price and have near-term catalysts, with an investment horizon ranging from a quarter to two years [1] Group 2 - The analysis is based on fundamental research across various sectors, including chemicals, homebuilders, building materials, industrials, and metals & mining [1] - The analyst has over 3 years of active investing experience and has served as a buy-side analyst at a boutique research firm and family offices [1]

Core Insights - Watsco, Inc. is a leading player in the North American HVAC market, with a strong financial foundation of over $640 million in cash and investments and no debt [1] - The company reported earnings per share (EPS) of $3.98 for Q3 2025, missing the estimated $4.44, which represents a 5.46% negative surprise [2] - Watsco's revenue for the same quarter was $2.07 billion, falling short of the estimated $2.17 billion, marking a 2.21% miss [3] Financial Performance - The EPS decreased from $4.22 in the same quarter last year, indicating a challenging period for the company [2] - Revenue declined from $2.16 billion reported in the same period last year [3] - Watsco has only surpassed consensus revenue estimates once in the last four quarters [3] Market Position and Valuation - Despite the earnings and revenue shortfalls, Watsco maintains a strong market position with a price-to-earnings (P/E) ratio of 26.52 and a price-to-sales ratio of 2.01 [4][6] - The company's enterprise value to sales ratio is also 2.01, indicating stable valuation relative to its sales [4] - Watsco's low debt-to-equity ratio of 0.10 and a robust current ratio of 3.84 further underscore its financial health [4][6] Cash Flow and Returns - Watsco's ability to generate cash flow is reflected in its enterprise value to operating cash flow ratio of 27.23 [5] - The company's earnings yield stands at 3.77%, providing insight into the return on investment [5] - Watsco has achieved an 18% compounded annual total-shareholder return since 1989, driven by strategic acquisitions and organic growth [5]

Financial Data and Key Metrics Changes - Watsco Inc. reported a total sales decline of 4% and a 3% decline in the U.S. market, with unit volumes remaining subdued [4][5] - Gross margins improved by 130 basis points to 27.5%, with ongoing initiatives aimed at exceeding 30% in the long term [4][5] - Record cash flow of $355 million was generated in the third quarter, with a strong balance sheet and no debt [5][6] Business Line Data and Key Metrics Changes - Non-equipment sales showed growth, with double-digit pricing gains on new products, while commercial refrigeration products also experienced sales growth [4][5] - The non-equipment segment, which includes parts and supplies, constitutes over 20% of Watsco's revenues, with parts alone accounting for 8% [15][16] Market Data and Key Metrics Changes - E-commerce penetration continues to grow, accounting for 34% of total sales, with certain U.S. markets seeing penetration rates of 60% to 70% [7] - The number of contractors and technicians using the mobile app reached 72,000, reflecting an 18% increase [7] Company Strategy and Development Direction - The company is focused on innovation and technology investments to enhance competitive positioning, including the development of new technology for institutional customers and the use of AI for operational efficiency [8] - Watsco aims to improve inventory turns and cash flow, targeting a reduction of $500 million in inventory by year-end [55][57] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the long-term fundamentals of the industry despite current volatility, indicating that the transition to next-generation equipment is largely complete [4][5] - The company acknowledged the challenges posed by low consumer confidence and a slowdown in housing activity, but remains committed to strengthening its operations and capabilities [127][148] Other Important Information - The company is exploring potential acquisition opportunities due to its strong financial position, with a focus on expanding its distributor network [45] - Management emphasized the importance of controlling factors within their influence, such as customer service and margin improvement, amidst external market challenges [27] Q&A Session Summary Question: What is the dynamic between repair and replace in the current market? - Management clarified that the market is seeing both repair and replacement, with geographic differences influencing consumer behavior [12][14] Question: How does the company view the recent distributor movement reported by Carrier? - Management acknowledged the softness in the market but indicated that their own revenue decline is in the mid-single digits, not as severe as reported by others [31][33] Question: What are the expectations for inventory levels by year-end? - Management aims to improve inventory turns and expects to end the year with inventories near historical levels, targeting a reduction of $500 million [55][57] Question: How is the company addressing pricing pressures from OEMs? - Management stated that they are good customers to OEMs and are in discussions to manage pricing effectively, but specifics on future price increases remain uncertain [70][73] Question: What trends are being observed in contractor sales and inventory? - Management noted that contractor experiences vary widely, with some performing well while others face challenges, indicating a fragmented market [103][104] Question: How does the company view the impact of the A2L transition on customer behavior? - Management believes that while the transition to A2L products has increased costs, broader macroeconomic factors are more significantly impacting consumer spending and confidence [127][128]

Financial Data and Key Metrics Changes - The company reported a total sales decline of 4% and a 3% decline in the U.S. market, with unit volumes remaining subdued but achieving double-digit pricing gains on new products [4][5] - Gross margins improved by 130 basis points to 27.5%, with ongoing initiatives aimed at exceeding 30% in the long term [4][5] - Record cash flow of $355 million was generated in the third quarter, with a strong balance sheet and no debt [5][6] Business Line Data and Key Metrics Changes - Non-equipment sales, which include parts and supplies, accounted for over 20% of revenues, with parts alone making up 8% [15] - The company is focusing on enhancing sales in the non-equipment market, which currently represents roughly 30% of total sales [8] Market Data and Key Metrics Changes - E-commerce penetration has grown to 34% of total sales, reaching up to 60% to 70% in certain U.S. markets [7] - The number of contractors and technicians using the mobile app has increased by 18%, totaling 72,000 users [7] Company Strategy and Development Direction - The company is investing in innovation and technology to enhance competitive positioning, including the development of new technology for institutional customers and the use of AI for operational efficiency [8] - There is a focus on improving inventory turns and cash flow, with a target of reducing inventory by $500 million by year-end [55][57] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the long-term fundamentals of the industry despite current volatility, expecting improvements as the product transition concludes [4][5] - The company is preparing for potential acquisition opportunities due to its strong financial position, with a focus on maintaining flexibility in capital allocation [45] Other Important Information - The transition to next-generation equipment with A2L refrigerants is largely complete, affecting approximately 55% of products sold [3][4] - The company is experiencing a fluid market environment, with varying demand across different regions [26][39] Q&A Session Summary Question: What is the dynamic between repair and replace in the current market? - Management indicated that both repair and replace are occurring, with geographic differences influencing consumer behavior [12][14] Question: How does the company view the recent distributor movement reported by Carrier? - Management acknowledged the softness in demand but noted that their experience shows a mid-single-digit decline in revenue, which is not as severe as reported by others [17][33] Question: What is the outlook for inventory levels by year-end? - Management aims to improve inventory turns and expects to end the year with inventories near historical levels [50][55] Question: Is there a plan for aggressive share repurchase given the current stock valuation? - Management is considering using cash for acquisitions rather than share repurchases, given the potential opportunities in the market [45] Question: What are the trends in customer behavior regarding product mix? - There has been a shift towards lower-tier products, but the company is also seeing success in selling higher efficiency systems through its OnCall Air platform [80][81]