WATSCO INC (WSO): what the price requires
At today's price, WATSCO INC (WSO) is priced for +19.8% growth. boothcheck doesn't publish a fair value or a price target; it shows what the price assumes, so you can judge whether that bar is too high.
Generated: 2026-07-14 · Exported: 2026-07-16 · Source: https://boothcheck.com/report/WSO
Headline
| Field | Value |
|---|---|
| Ticker | WSO |
| Company | WATSCO INC |
| Current price | $391.70/sh |
What The Price Requires (Inversion)
The assumption today's price embeds, recovered by inverting the valuation.
| Field | Value |
|---|---|
| Inversion basis | whole-company |
| Operating margin needed | 6.9% |
| Operating margin today | 10.1% |
| Margin compression implied | -3.2pp |
| Implied growth | 19.8% |
| Multiple paid | 21x operating income |
The operating-margin requirement is derived from the framework's value band at year 12, a separately labeled basis from the headline growth/duration solve.
Solve inputs: computed at a 9.5% cost of capital with 4% terminal growth over a 5-year stage; each 1pp of cost of capital moves the implied operating-profit growth ~7.1pp.
How unusual the bet is: within-range
| Reference | Value |
|---|---|
| vs own history | +0.56σ |
| sustained it ~5 years at this level | 38% |
| implied end-window share | 0% |
Valuation X-Ray
Every valuation family lands below the price. The price therefore requires assumptions beyond what those standard frames encode.
How the valuation models price the stock relative to the market price. Price/FV above 1.0 means the market pays more than that lens defends (expensive); at or below 1.0 the lens can defend the price.
| Family | Median price/FV | Models | Reads |
|---|---|---|---|
| Asset | 2.77x | 5 | expensive |
| Earnings | 2.16x | 4 | expensive |
| Relative | 1.44x | 3 | expensive |
| Growth | 1.99x | 4 | expensive |
Families that call it expensive: Asset, Earnings, Growth
The models below discount at their own flat-beta convention rates (cost of equity 9.3%, WACC 9.1%); the inversion above states its own rate.
Per-Model Detail (n=16)
| Model | Family | FV | Price/FV | Applicable | Methodology |
|---|---|---|---|---|---|
| DCF Perpetual Growth | Growth | $182.07 | 2.15x | yes | FCF base $0.7B, growth -4% (input: historical growth), terminal g 0.5%, WACC 9.1%, 5yr projection |
| DCF Exit Multiple | Growth | $346.67 | 1.13x | yes | Exit EV/EBITDA: 18.4x / 20.4x / 22.4x (bear / base = today's held flat / bull), 5yr |
| Relative Valuation | Relative | $271.29 | 1.44x | yes | P/E 21.59x (blended: static sector reference 18x + trailing (TTM) 30x), scenarios: 18.2x / 21.6x / 24.9x (bear / base = reference held flat / bull), EV/EBITDA 14.51x |
| Simple DDM | Growth | — | — | no | — |
| Two-Stage DDM | Growth | $135.77 | 2.89x | yes | Stage 1: -8% for 5yr, Stage 2: 3.5% perpetual |
| Simple Excess Return | Asset | $141.24 | 2.77x | yes | BV/sh $72.75, ROE (TTM) 18.0%, ke 9.3% |
| Two-Stage Excess Return | Asset | $194.30 | 2.02x | yes | 5yr excess ROE then converge to ke=9.3% |
| Discounted Future Market Cap | Growth | $214.59 | 1.83x | yes | Rev $7.2B, growth -4% (input: historical growth; tapered), Terminal P/S: 1.7x / 2.1x / 2.4x (bear / base = today's held flat / bull, cap 8x) |
| Growth-Adjusted P/E | Relative | — | — | no | — |
| Margin Trajectory | Growth | — | — | no | — |
| Earnings Power Value | Earnings | $174.81 | 2.24x | yes | Normalized EBIT (5y avg op income, one-time charges added back) $0.76B × (1−20%) / WACC 9.1% → EPV (no growth) |
| Residual Income | Asset | $193.21 | 2.03x | yes | BV $72.75 + 5yr PV of (ROE (TTM) 18.0% − Kₑ 9.3%) × BV; BV grows 8.8%/yr |
| Graham Number | Asset | $141.26 | 2.77x | yes | √(22.5 × EPS $12.19 × BVPS $72.75) — Graham's conservative floor |
| EV/EBITDA Relative | Relative | $231.18 | 1.69x | yes | EBITDA $0.73B × sector EV/EBITDA 12.0x |
| FCF Yield | Earnings | $198.37 | 1.97x | yes | FCF $694.4M / Kₑ 9.3% — zero-growth perpetuity |
| SBC-Adj FCF Yield | Earnings | $188.51 | 2.08x | yes | SBC-adj FCF $0.66B (FCF $0.69B − SBC $0.03B) capitalized at Kₑ |
| Ben Graham Formula | Earnings | $10.22 | 38.33x | yes | EPS $12.19 × (8.5 + 2×-5.0%) × (4.4 / 5.3%) (excluded from median) |
| ROIC-Justified P/B | Asset | $25.57 | 15.32x | yes | BV $72.75 × (ROIC 3.2% / WACC 9.1%) |
| P/Sales Sector | Relative | $476.84 | 0.82x | yes | Revenue $7.24B × sector P/S 2.5x |
| PEG Fair Value | Relative | — | — | no | — |
| Earnings Yield | Earnings | $131.78 | 2.97x | yes | EPS $12.19 / required return 9.3% (Rf 4.3% + ERP 5.0%) |
| Funds From Operations Multiple | Relative | — | — | no | — |
| Clinical Phase NPV | Growth | — | — | no | — |
| Merton | Asset | — | — | no | — |
| V5 Mechanical | — | — | — | no | — |
Solvency
| Field | Value |
|---|---|
| Net cash | $106.5m |
| Net debt / NOPAT (after-tax) | -0.18x (net cash) |
| Net debt / operating income (pre-tax) | -0.15x (net cash) |
| Share count CAGR (dilution) | 1.5% |
| Burning cash | no |
Interest expense is not separately reported in the latest filings, so interest coverage cannot be computed.
Bullet Takeaways
At $400.99 the price works out to roughly 21x company-wide operating income, which inverts into about 21.5% operating growth a year for five years. That sits within range of plausible rather than stretched, partly because the most recent quarter showed markets stabilizing.
Watsco is the scaled consolidator of a fragmented HVAC/R distribution market, carrying net cash of about $106 million, a return on equity near 18%, and a 9.9% operating margin. It just raised its annual dividend 10% to $13.20.
The A2L refrigerant transition that dragged on volumes is largely complete, and Q1 2026 EPS of $1.87 beat estimates as average selling prices rose 9%. The bet is that volumes recover on top of a higher price base.
Bull Case
Start with the fear, because it is the obvious one: at roughly 21x operating income and a trailing P/E near 27, Watsco looks expensive, and recent revenue growth has actually been negative as the HVAC market digested a refrigerant-driven price reset. The question is whether the data supports that fear or undercuts it, and the recent quarter argues for the latter. Q1 2026 revenue was essentially flat at $1.53 billion, but EPS of $1.87 beat the $1.69 estimate by nearly 11%, and management characterized the quarter as reflecting stabilizing markets and improved operating efficiency. The volume drag was the A2L refrigerant transition, which began in early 2025 and touched about 55% of products sold across roughly 650 locations. That transition is now largely complete, and the price reset it forced, a 9% increase in average selling price for HVAC equipment, becomes a higher base to grow from rather than a recurring headwind.
Underneath the cyclical noise is a structurally advantaged distributor. Watsco is the scale leader in HVAC/R distribution, and the filing describes it as a key customer and partner to many of the leading manufacturers in its industry (FY2025 10-K, accession 0001193125-26-082486). It fields roughly 1,100 salespeople averaging 11 years of experience in the industry, a depth of relationships that is hard for a smaller rival to replicate (FY2025 10-K, accession 0001193125-26-082486). The business earns a return on equity near 18% against a cost of equity below 10%, generates more than $690 million of free cash flow, and carries net cash rather than net debt. That combination, scale plus a clean balance sheet, is why the residual-income and two-stage excess-return models land near the high $190s.
The technology layer is the growth surprise. E-commerce sales rose 16% in the quarter and the OnCallAir digital sales platform drove a 20% increase in customer sales, with management targeting more than $2 billion in gross merchandise value for the year. On top of organic growth, Watsco keeps consolidating a fragmented market: it agreed to acquire Jackson Supply, a Sunbelt distributor with about $230 million in annual sales, expected to close in the second quarter. The company funds all of this while raising the dividend 10% to $13.20 a share, a 3.3% yield well above the industry average. Against distribution peers like Applied Industrial and MSC Industrial, Watsco's mix of category leadership, digital adoption, and acquisition runway is the differentiator the premium multiple is paying for.
Bear Case
The competitive threat that matters most is disintermediation, and it comes from two directions at once. The largest HVAC original-equipment manufacturers, the same partners Watsco depends on, have been building their own direct-distribution and digital channels, and a manufacturer that decides to sell more directly to contractors can squeeze the middleman. The filing is explicit that the model depends on these supplier relationships and that if product costs rise under those agreements, Watsco would have to raise prices, risking cost inflation and the loss of customers (FY2025 10-K, accession 0001193125-26-082486). At the other end, large home-improvement retailers and online players keep pushing into the parts-and-supplies space that has historically been Watsco's. The technology investments that look like a growth story in the bull case are partly defensive: the company is digitizing to keep contractors inside its ecosystem before someone else captures them.
The valuation leaves no room for that competition to bite. No standard valuation family reaches today's price: it is rich on assets, on earnings power, on peer multiples, and even on forward growth. The earnings-power value, which capitalizes normalized operating profit, lands near $175, and the simple excess-return model near $141, both far below the $401 (June 28, 2026) quote. The inversion shows the price assumes about 21.5% operating growth a year for five years, and historically only about 35% of comparable fast-growers sustained that pace that long. The recent revenue trend has been roughly flat to negative, so the price is underwriting an acceleration that has not yet appeared in the top line.
The cyclicality is the third risk. HVAC demand tracks housing turnover, new construction, and big-ticket replacement decisions, all of which soften when rates stay high or confidence dips. The 9% jump in average selling price that flattered recent revenue was driven by the refrigerant mix shift and high-efficiency equipment, not by unit growth; unit volumes were actually lower. If the volume recovery the bulls expect does not materialize, the company laps a tough price comparison with no unit tailwind, and a premium multiple on a distributor with mid-single-digit organic growth is vulnerable. Acquisitions like Jackson Supply help, but integration risk and the price paid for deals are their own concern, as the filing's own forward-looking cautions about integrating acquired companies acknowledge (FY2025 10-K, accession 0001193125-26-082486).
Valuation
No valuation family reaches the price, yet the inversion still lands within range, which is the interesting tension here. Against the $400.99 quote, the DCF perpetual-growth model lands near $182, the earnings-power value near $175, the peer P/E model near $274, the EV/EBITDA-relative model near $231, and the free-cash-flow yield near $198. The blended X-ray estimate sits near $188. Only the DCF exit-multiple model, which assumes today's EBITDA multiple holds, reaches near the price at about $353. On a static read, the stock looks rich across the board.
The inversion softens that conclusion. At today's level the market pays about 21x company-wide operating income, which the model translates into operating growth of roughly 21.5% a year for five years, discounted at a 9.7% cost of capital with 4% terminal growth, where each percentage point of cost moves the implied growth about seven points. The near-term pace is within what the company has delivered in stronger years, so the model characterizes the assumption as within range rather than elevated; the stretch is sustaining it for five years, which only about 35% of comparable fast-growers have managed.
The gap between the static methods, which say expensive, and the inversion, which says plausible, reflects what a quality distributor is worth. The standard models penalize the recent flat-to-negative revenue and the modest book value, while the inversion credits the durable margin and the recovery now visible in the data. The honest read is that the price is a quality premium that requires the post-A2L volume recovery and the digital and acquisition flywheel to keep compounding. The dividend, raised 10% to $13.20 for a 3.3% yield, is a tangible return while that thesis plays out.
Catalysts
The April Q1 2026 report was the recent catalyst: revenue flat at $1.53 billion but EPS of $1.87 beating the $1.69 estimate, adjusted EBITDA ahead of expectations, and management framing the quarter as stabilizing markets. The same release announced the Jackson Supply acquisition, about $230 million in annual sales, expected to close in the second quarter. The next earnings report is the key test of whether unit volumes recover now that the A2L refrigerant transition is largely behind the company, since the recent revenue was carried by a 9% price increase rather than volume.
The digital platform is the catalyst to watch for upside. E-commerce sales rose 16% and OnCallAir drove a 20% increase in customer sales toward a more than $2 billion gross-merchandise-value target; continued acceleration there would validate the technology-driven share-gain thesis. Capital allocation is a steady positive: the 10% dividend increase to $13.20 a share lifts the yield to 3.3%, and the acquisition pipeline keeps consolidating a fragmented market. Analyst sentiment is neutral, a Hold consensus with a price target near $420, so the stock is seen as roughly fairly valued. The chief risks to the timeline are a housing-driven downturn in HVAC demand and any sign that manufacturer-direct or retail channels are taking share, either of which would undercut the volume recovery the price is counting on.
Sources: Watsco Q1 2026 8-K earnings release (SEC); GlobeNewswire: Watsco Q1 2026 results; StockTitan: Watsco Q1 results and Jackson Supply deal; Public.com: WSO analyst forecast; StockStory: Watsco Q1 CY2026 strong sales.
Peer Cohorts (Per Segment, With Filing Citations)
HVAC/R Distribution (whole company) (reported)
- FERG (Ferguson Enterprises Inc.)
- (no filing in the citation store)
- AIT (APPLIED INDUSTRIAL TECHNOLOGIES, INC.)
- (no filing in the citation store)
- MSM (MSC INDUSTRIAL DIRECT CO., INC.)
- (no filing in the citation store)
- GWW (W.W. GRAINGER, INC.)
- (no filing in the citation store)
- WCC (WESCO International, Inc.)
- (no filing in the citation store)
- SITE (SiteOne Landscape Supply, Inc.)
- (no filing in the citation store)
- POOL (POOL CORPORATION)
- (no filing in the citation store)
- CNM (Core & Main, Inc.)
- (no filing in the citation store)
Methodology Note
- Priced-in inversion: the valuation is inverted on the current price to recover the operating-income growth, duration, and steady-state margin the price embeds (ROE for financials, FFO growth for REITs).
- Valuation x-ray: the valuation models, grouped into four families (asset, earnings, relative, growth). Each model is expressed as a price/FV ratio (distance from price), not a point fair-value estimate. The spread across families is the disagreement.
- Solvency: net cash/debt, net-debt-to-NOPAT, interest coverage, and share-count CAGR from EDGAR financials (net debt / FFO and fixed-charge coverage for REITs; regulatory-capital framing for financials).
- Peer cohorts: per-segment comparables with deep-linkable SEC filing citations.
Fundamentals sourced from SEC EDGAR filings. Current price from Databento. The priced-in inversion and valuation x-ray are computed by the boothcheck engine; narrative composed by AI from the structured data.