Watsco Earnings: Stock Slides on EPS Miss, but Profit Margin Remains Robust

Watsco’s stock traded lower on July 30 after the narrow-moat-rated distributor of heating, ventilation, air-conditioning, and refrigeration products reported second-quarter revenue and earnings per share that fell short of FactSet consensus estimates. This was the third consecutive quarter Watsco missed on the top and bottom lines. Nevertheless, Watsco continues to deliver above-historical-average profit margins, but we believe market expectations for the company have become too optimistic. Indeed, while we’ve raised our fair value estimate approximately 9% to $310 per share, that’s still well below Watsco’s current stock price. Roughly 7 percentage points of our fair value estimate raise came from our upwardly revised free cash flow conversion forecast due to better working capital management. The time value of money since our last update accounted for 2 percentage points of our increased fair value.