Why Is Watsco (WSO) Down 3.6% Since Last Earnings Report?

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].