A Look at Watsco's (WSO) Valuation Following Weaker Earnings and Industry Headwinds

Watsco (WSO) just released its third-quarter 2025 earnings, missing estimates as both earnings per share and revenue declined compared to last year. The results reflected ongoing industry shifts and softer housing demand.

See our latest analysis for Watsco.

Watsco’s share price has been under pressure this year, sliding 26% year-to-date, with the latest results and uncertain demand weighing on investor confidence. Even so, the three- and five-year total shareholder returns of 41% and 82% suggest that its long-term momentum has not fully faded.

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With earnings under pressure, yet record gross margin and a meaningful discount to analyst price targets, investors face a familiar dilemma: is Watsco undervalued in the current market environment, or is the stock simply reflecting realistic growth expectations?

Most Popular Narrative: 15.3% Undervalued

With Watsco’s fair value calculated at $408.90, which is over $60 above the current share price, the most popular narrative points to a meaningful disconnect between the latest close and long-term fundamentals.

The company's core HVAC replacement business saw a 10% sales increase from higher volumes and a richer mix of high-efficiency systems. This may continue to drive revenue growth and potentially improve gross margins as more of this product mix transitions to broader market adoption.

Read the complete narrative.

Think these new systems are Watsco’s ticket to outperformance? The narrative’s fair value depends on optimistic assumptions such as future market adoption, shifting sales mixes, and sharper profit margins. Want a peek into the numbers behind that valuation leap? You may want to look closer and see the surprising projections powering this price target.

Result: Fair Value of $408.90 (UNDERVALUED)

Have a read of the narrative in full and understand what's behind the forecasts.

However, potential delays in the A2L transition or pressure from tariffs could disrupt Watsco’s recovery and call the company’s bullish valuation into question.

Find out about the key risks to this Watsco narrative.

Another View: Market Multiples Tell a Different Story

While the narrative and fair value suggest Watsco is undervalued, the price-to-earnings ratio paints a less convincing picture. At 27x, Watsco trades well above the US Trade Distributors industry average of 19.5x, its peers at 18x, and even the fair ratio of 23.6x suggested by regression analysis. This gap raises questions about valuation risk. Does the market see something others do not, or is there more downside ahead?

See what the numbers say about this price — find out in our valuation breakdown.

Build Your Own Watsco Narrative

If you see things differently or want to put your own analysis to the test, you can build a narrative with your perspective in just a few minutes. Do it your way.

A good starting point is our analysis highlighting 4 key rewards investors are optimistic about regarding Watsco.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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