Due to climate change and the associated global warming, the number of households with air conditioners and fans has steadily increased. The global HVAC (Heating, Ventilating & Air Conditioning) market is projected to reach $278 billion in 2026 and is expected to grow to approximately $445 billion by 2033, representing an annual growth rate of 7 percent. The largest distributor of HVAC equipment in North America is the US company Watsco Inc. (ISIN US9426222009).
Source: Stock price
The stock price has increased sixfold over the past 20 years, while the S&P 500 index has only increased fivefold in the same period. Including dividends received, investors have enjoyed a total return of over 1000 percent.
However, the current share price performance is unsatisfactory. Based on the last 12 months, there has been a drawdown of over 20 percent. Does this present a favorable entry point for contrarian investors to buy into an outperforming stock?
We will investigate this in a Watsco stock analysis.
Watsco was founded in 1956 in Florida, USA. Since 1989, the company has specialized in the distribution of HVAC equipment. Their product range includes both equipment and accessories for heat pumps, heaters, fans, air conditioners, cold storage units, and much more. Watsco supplies local installers through its extensive dealer network.
Source: Ai Insights
The American company is growing both organically and through acquisitions. Since 1989, more than 70 wholesalers have been acquired and integrated into the Watsco distribution system.
Even after the acquisition, the wholesalers continue to operate independently but can leverage Watsco's experience, network of regional customers, software, and economies of scale with its suppliers.
As a serial acquirer, management refers to this strategy as "Buy & Build."
Watsco currently has approximately 700 branches serving 43 US states and is also active in Canada, Latin America, and the Caribbean.
Source: Watsco Investor Relation
Most of Watsco's locations are in the so-called "Sun Belt States." These are states where the climate is warmer than, for example, on the East Coast or in the northern United States. They include California, Texas, Arizona, and Florida. The number of installed air conditioning units is also highest in these states. 102 million units in the US have been in operation for 10 years or more. Management anticipates continued revenue growth in the coming years due to the age of many units, as many customers may switch to energy-efficient models.
Source: Watsco Investor Relation
At the same time, the number of installed air conditioning units continues to rise. Watsco counts approximately 90 million units in its service area. This number could increase further in the coming years. The more installed units Watsco's customers service, the more likely it is that a component or the entire unit will be replaced through Watsco.
62 percent of the units supplied come from Carrier Global, which represents a certain dependence on this supplier. This dependence has been reduced through several joint ventures with Carrier. Watsco holds a majority stake in each of these ventures.
Watsco is increasingly transitioning its sales system to digital solutions.
In addition to its own e-commerce platform, through which customers can purchase units and accessories, the company has offered another application, "OnCall Air," since mid-2022.
Source: Watsco Investorday 2025
OnCall Air helps installers select the right equipment, displays available stock, offers financing options, and provides real-time delivery updates.
In the first nine months of 2025, gross order volume increased by 20 percent compared to the same period of the previous year. The number of orders placed through OnCall Air also rose by 14 percent.
The financing option resulted in a 17 percent larger average order value when customers were able to complete their purchases using external financing.
According to Watsco, their digital solutions are being used more and more frequently, making the company increasingly attractive to customers. Nevertheless, the American company lacks a clear competitive advantage. Installers can also purchase HVAC equipment from other vendors without incurring high switching costs.
The majority of Watsco's revenue is generated from the sale of HVAC equipment to private US households.
55 percent of total revenue comes from the residential market, and 90 percent of revenue is generated in the USA.
Source: Watsco Investor-Relations
New builds account for only 10-15 percent of sales. Two-thirds are achieved with existing residential properties. Accordingly, Watsco's success depends on both home sales in the US and US consumers themselves. Private customers tend to keep older systems longer if their budget doesn't allow for a new unit. Furthermore, new HVAC equipment is typically purchased when an older property is acquired.
There is currently good news for Watsco. Home sales in the US rose again by 3.3 percent in November 2025 compared to the previous year. Falling mortgage rates and rising American incomes, coupled with stagnant real estate prices, are creating positive momentum.
Watsco's earnings are heavily dependent on the housing market and consumer sentiment in the US. Further declines in US interest rates could accelerate sales growth if home sales continue to rise and wage inflation leads to increased incomes for US households.
In early November 2025, Watsco reported its quarterly results for the September quarter.
The investor reaction was slightly positive. The stock rose by 2.8 percent.
Source: Earnings Calendar
Revenue declined by 4 percent to $2.07 billion. Due to lower product costs, gross profit remained at the previous year's level of $569 million. However, due to increased administrative expenses, EBIT fell by 6 percent to $225 million.
Source: Financial data
Net income decreased by 5 percent compared to the same quarter last year, reaching $151 million. This represents a margin of 7 percent.
The reported quarterly figures are solid in the context of a cyclical slump in US consumer spending and a stagnant housing market in North America. Investors will be watching closely in 2026 to see if Watsco's revenue growth can accelerate again should interest rates fall further.
Analysts predict further single-digit revenue growth for Watsco in the coming years.
Source: Revenue estimates
Revenue of $7.6 billion is expected for fiscal year 2026. This would represent an increase of approximately 4 percent. Analysts do not foresee accelerated revenue growth in subsequent years either.
It is quite possible that Watsco's management will continue to pursue growth through acquisitions. However, no acquisitions are currently planned and should therefore not be expected. Mid-single-digit revenue growth through 2028 thus appears realistic.
Analysts have similar expectations for earnings per share (EPS (TTM)) in 2026. This is expected to be $13.25.
Source: EPS & P/E Ratio
The increase in EPS would be approximately 9 percent. Earnings per share of $17.42 are expected on average for 2028. This seems ambitious, given that revenue growth is projected to be only around 5 percent.
The forecast for 2026 remains positive; however, analysts' medium-term earnings per share expectations may be too high.
Watsco shareholders have enjoyed increasing dividend payments for many years. The dividend was only reduced in 2013 and has increased annually since then.
Source: Watsco Dividend analysis
Watsco stock is currently ranked as the top scorer with 12 points according to the dividend strategy. The minimum score of 12 points required to be among the top scorers is broken down as follows.
Source: Watsco Dividend Analysis
The stock receives 1 point for its current dividend yield of approximately 3.2 percent. A yield of 3.5 percent or higher would have earned 2 points. The average dividend yield over the last 10 years is 2.97 percent, earning 2 points. A third point would be added for a yield of 3 percent or higher.
The stock receives full marks for its payout ratio, which averages 70 percent over the last 3 years. However, this ratio appears too high if investors also anticipate potential share buybacks.
Furthermore, 3 points are awarded for the consistently paid dividends over the last 10 years. Finally, another 3 points are awarded for the average dividend increase over the last 5 years. The annualized dividend growth is an impressive 11 percent.
For income investors, Watsco stock offers considerable quality. The current dividend yield is over 3 percent, the annual increases are in the double digits and the payout ratio is still within the acceptable range.
For the dividend yield of over 3 percent mentioned in the previous section, interested investors currently have to pay a premium for Watsco stock on the stock exchange.
The price-to-earnings ratio (P/E ratio) is currently 30 (based on the last 12 months); based on expected annual earnings, it is 31. This appears too high, as the American company cannot justify such a valuation with low single-digit revenue growth. The enterprise value/sales (EV/sales) ratio of 2.0 also seems too high for a wholesaler.
Source: Key metrics
The Americans have a clean balance sheet and are market leaders in their segment. This seems to justify a certain valuation premium, but the current valuation might still be too high despite the share price decline.
Source:StocksGuide Ai
We have identified a cyclical dependency, although the situation could improve. Watsco could benefit from falling interest rates and rising household budgets.
For investors, Watsco could only be a worthwhile investment at its current price level if management continues to find attractive acquisition targets that they can integrate into their extensive distribution network. Furthermore, the company's dependence on the American real estate market should be taken into account. However, there have recently been signs of a slight recovery in this sector.
Analysts also hold a cautious view.
Source: Watsco Target price
70 percent of experts currently recommend holding the stock. A quarter, however, still rate it as a buy.
The most recent ratings over the past few months have all been hold recommendations. Analysts don't seem to believe that a recovery in the North American housing market will accelerate growth.
Therefore, the stock might only be suitable for a watchlist at present. An EV/Sales alert of 1.4 or below could present an interesting entry point.
The author and/or persons or companies associated with StocksGuide own or may own shares of Watsco. This article represents an expression of opinion and does not constitute investment advice. Please note the legal information.