Record Gross Margin Amid Revenue Pressures Might Change the Case for Investing in Watsco (WSO)

• In its most recent results, Watsco reported third-quarter 2025 earnings that missed analyst expectations, with both earnings per share and revenues declining compared to the previous year due to pressures from the industry-wide transition to new refrigerant systems, softer consumer spending, and a housing market slowdown.
• Despite these top-line challenges, the company achieved record gross margin expansion thanks to effective pricing and a focus on optimizing its product mix, while management reiterated its commitment to ongoing digital transformation and technology platform investment.
• Now, we’ll consider how Watsco’s record gross margin performance and ongoing market headwinds might affect the company’s long-term investment outlook.

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Watsco Investment Narrative Recap

For investors considering Watsco, the core belief centers on the company’s ability to benefit from the large-scale transition to higher-efficiency HVAC systems that are expected to drive long-term sales and profitability. The most recent earnings miss is unlikely to materially change the importance of the A2L refrigerant transition as the key near-term catalyst, though it highlights how industry headwinds, such as a sluggish housing market and changing regulations, remain the biggest immediate risk to results.

One recent announcement relevant to these results is management’s reaffirmation of their long-term goal to consistently generate operating cash flow exceeding net income, even amid market volatility. This commitment, paired with expanding investment in digital transformation, supports the company’s focus on sustaining margin improvement despite current economic uncertainty.

Yet for investors, it is important to keep in mind the potential downside if delays or complications arise with the A2L transition…

Read the full narrative on Watsco (it's free!)

Watsco's narrative projects $9.1 billion in revenue and $758.2 million in earnings by 2028. This requires 6.5% yearly revenue growth and a $262.7 million earnings increase from the current $495.5 million.

Uncover how Watsco's forecasts yield a $408.90 fair value, a 20% upside to its current price.

Exploring Other Perspectives

Three members of the Simply Wall St Community recently estimated Watsco’s fair value in a wide range from US$104.90 to US$522.09 per share. With A2L system transition pressures weighing on margins and revenue, consider how differing views on execution and timing could shape these outlooks for Watsco’s future performance.

Explore 3 other fair value estimates on Watsco - why the stock might be worth as much as 53% more than the current price!

Build Your Own Watsco Narrative

Disagree with existing narratives? Create your own in under 3 minutes - extraordinary investment returns rarely come from following the herd.

• A great starting point for your Watsco research is our analysis highlighting 4 key rewards that could impact your investment decision.
• Our free Watsco research report provides a comprehensive fundamental analysis summarized in a single visual - the Snowflake - making it easy to evaluate Watsco's overall financial health at a glance.

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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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