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Why Is Watsco (WSO) Down 3.6% Since Last Earnings Report?
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It has been about a month since the last earnings report for Watsco (WSO - Free Report) . Shares have lost about 3.6% in that time frame, underperforming the S&P 500.
But investors have to be wondering, will the recent negative trend continue leading up to its next earnings release, or is Watsco due for a breakout? Well, first let's take a quick look at its latest earnings report in order to get a better handle on the recent drivers for Watsco, Inc. before we dive into how investors and analysts have reacted as of late.
Watsco Q3 Earnings & Revenues Miss Estimates, Gross Margin Up Y/Y
Watsco reported third-quarter 2025 earnings of $3.98 per share, missing the Zacks Consensus Estimate of $4.21 and declining 6% year over year from $4.22 per share.
The HVAC distributor posted revenues of $2.07 billion, falling short of the consensus estimate of $2.11 billion and down 4% year over year. The results reflected ongoing market pressures from the industry-wide transition to new A2L refrigerant systems, weaker consumer spending and a slowdown in housing activity.
In the U.S. market, sales dipped 3%, while non-U.S. revenues declined 14%. Segment-wise, HVAC equipment (67% of sales) fell 7%, offset by a 2% rise in non-equipment HVAC products and 4% growth in commercial refrigeration sales.
Margins and Profitability
Despite the top-line pressure, gross profit remained stable at $569 million, with gross margin expanding 130 basis points to a record 27.5%, driven by effective pricing and product mix optimization.
However, operating income declined 6% to $235 million, as selling, general and administrative expenses rose 5%, partly from higher labor, logistics, and transition-related costs. The operating margin came in at 11.4%, compared with 11.6% in the prior-year quarter.
Balance Sheet and Liquidity
Watsco ended the quarter with a strong balance sheet, holding $324 million in cash and cash equivalents and $200 million in short-term investments, totaling $524 million in liquidity. The company reported no long-term debt, underscoring its conservative capital structure.
Inventory levels declined sequentially to $1.6 billion, reflecting successful working capital normalization efforts. Operating cash flow reached a record $355 million for the quarter, highlighting solid cash generation.
Outlook
Watsco expects continued volatility through early 2026 as the refrigerant transition progresses, but anticipates efficiency gains in 2026 as one-time costs subside. The company remains focused on expanding its technology-driven platforms and leveraging AI tools to enhance margins and customer engagement.
Management reaffirmed its long-term goal of generating operating cash flow exceeding net income, supported by a debt-free balance sheet and ongoing digital transformation initiatives.
How Have Estimates Been Moving Since Then?
Since the earnings release, investors have witnessed a downward trend in estimates revision.
The consensus estimate has shifted -12.29% due to these changes.
VGM Scores
At this time, Watsco has a average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. Following the exact same course, the stock has a grade of F on the value side, putting it in the bottom 20% quintile for value investors.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Watsco has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.
Performance of an Industry Player
Watsco is part of the Zacks Manufacturing - General Industrial industry. Over the past month, Illinois Tool Works (ITW - Free Report) , a stock from the same industry, has gained 2.2%. The company reported its results for the quarter ended September 2025 more than a month ago.
Illinois Tool Works reported revenues of $4.06 billion in the last reported quarter, representing a year-over-year change of +2.3%. EPS of $2.81 for the same period compares with $2.65 a year ago.
For the current quarter, Illinois Tool Works is expected to post earnings of $2.68 per share, indicating a change of +5.5% from the year-ago quarter. The Zacks Consensus Estimate has changed -0.9% over the last 30 days.
The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for Illinois Tool Works. Also, the stock has a VGM Score of D.
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Why Is Watsco (WSO) Down 3.6% Since Last Earnings Report?
It has been about a month since the last earnings report for Watsco (WSO - Free Report) . Shares have lost about 3.6% in that time frame, underperforming the S&P 500.
But investors have to be wondering, will the recent negative trend continue leading up to its next earnings release, or is Watsco due for a breakout? Well, first let's take a quick look at its latest earnings report in order to get a better handle on the recent drivers for Watsco, Inc. before we dive into how investors and analysts have reacted as of late.
Watsco Q3 Earnings & Revenues Miss Estimates, Gross Margin Up Y/Y
Watsco reported third-quarter 2025 earnings of $3.98 per share, missing the Zacks Consensus Estimate of $4.21 and declining 6% year over year from $4.22 per share.
The HVAC distributor posted revenues of $2.07 billion, falling short of the consensus estimate of $2.11 billion and down 4% year over year. The results reflected ongoing market pressures from the industry-wide transition to new A2L refrigerant systems, weaker consumer spending and a slowdown in housing activity.
In the U.S. market, sales dipped 3%, while non-U.S. revenues declined 14%. Segment-wise, HVAC equipment (67% of sales) fell 7%, offset by a 2% rise in non-equipment HVAC products and 4% growth in commercial refrigeration sales.
Margins and Profitability
Despite the top-line pressure, gross profit remained stable at $569 million, with gross margin expanding 130 basis points to a record 27.5%, driven by effective pricing and product mix optimization.
However, operating income declined 6% to $235 million, as selling, general and administrative expenses rose 5%, partly from higher labor, logistics, and transition-related costs. The operating margin came in at 11.4%, compared with 11.6% in the prior-year quarter.
Balance Sheet and Liquidity
Watsco ended the quarter with a strong balance sheet, holding $324 million in cash and cash equivalents and $200 million in short-term investments, totaling $524 million in liquidity. The company reported no long-term debt, underscoring its conservative capital structure.
Inventory levels declined sequentially to $1.6 billion, reflecting successful working capital normalization efforts. Operating cash flow reached a record $355 million for the quarter, highlighting solid cash generation.
Outlook
Watsco expects continued volatility through early 2026 as the refrigerant transition progresses, but anticipates efficiency gains in 2026 as one-time costs subside. The company remains focused on expanding its technology-driven platforms and leveraging AI tools to enhance margins and customer engagement.
Management reaffirmed its long-term goal of generating operating cash flow exceeding net income, supported by a debt-free balance sheet and ongoing digital transformation initiatives.
How Have Estimates Been Moving Since Then?
Since the earnings release, investors have witnessed a downward trend in estimates revision.
The consensus estimate has shifted -12.29% due to these changes.
VGM Scores
At this time, Watsco has a average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. Following the exact same course, the stock has a grade of F on the value side, putting it in the bottom 20% quintile for value investors.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Watsco has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.
Performance of an Industry Player
Watsco is part of the Zacks Manufacturing - General Industrial industry. Over the past month, Illinois Tool Works (ITW - Free Report) , a stock from the same industry, has gained 2.2%. The company reported its results for the quarter ended September 2025 more than a month ago.
Illinois Tool Works reported revenues of $4.06 billion in the last reported quarter, representing a year-over-year change of +2.3%. EPS of $2.81 for the same period compares with $2.65 a year ago.
For the current quarter, Illinois Tool Works is expected to post earnings of $2.68 per share, indicating a change of +5.5% from the year-ago quarter. The Zacks Consensus Estimate has changed -0.9% over the last 30 days.
The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for Illinois Tool Works. Also, the stock has a VGM Score of D.