$238.00
$523.00
bear $238.00
base $355.00
bull $523.00
margin of safety $200.00
market price* $295.91
Watsco is the largest distributor of residential and light-commercial heating, air-conditioning and refrigeration equipment in North America. At the end of 2025 it sold from 695 branches (637 in the United States, 34 in Canada, 24 in Latin America and the Caribbean) to contractors who install and replace systems. HVAC equipment is about two-thirds of revenue, parts and supplies 29%, and commercial refrigeration 4%. The company estimates that 80-90% of US residential air-conditioning units sold are replacements. That makes demand much steadier than home building alone would suggest: a failed system in Florida or Texas, its two largest markets, gets replaced whatever the economy is doing. Carrier and its affiliates supplied 62% of Watsco's purchases in 2025. Carrier is also Watsco's partner in the Carrier Enterprise joint ventures (Watsco owns 80% of the two US ventures and 60% of the Canadian one), so part of the consolidated earnings belongs to Carrier. Earnings. We measure owner earnings as operating cash flow with the timing swings in working capital removed, minus stock-based pay and the spending needed to keep the business running. Capital spending is tiny, under half a percent of sales. Inventory and receivable swings alone moved yearly cash flow by up to $200 million, which is why we take them out. Because Carrier owns minority stakes in the ventures, we count only Watsco's share, about 85% in recent years. Per diluted share, owner earnings were $5.26 in 2016, then $6.20, $7.32, $7.25 and $7.83 in 2020, then $12.01 in 2021, $16.97 in 2022, $14.27, $14.20, and $13.43 in 2025. The step up after 2020 is real and has lasted. Equipment prices rose sharply in 2021-2023 and again with the 2023 SEER2 efficiency rules and the 2025 switch to A2L refrigerants, and those prices have not come back down. We start from the 2021-2025 median of $14.20 per share. That window includes the 2022 peak and the weak 2025. In 2025 unit volume of ducted residential systems fell 18%, partly offset by 8% higher selling prices, because of the refrigerant changeover, a mild summer, slow home building and homeowners putting off replacements. Interest paid is under $1 million a year, so cash flow before lenders is essentially the same figure. Owner earnings fell 5.4% in 2025. In the first half of 2026, net income attributable to Watsco was down about 8% on roughly flat revenue. So the base case starts 2026 with the existing business 8% below the $14.20 starting point, holds it there in 2027, and only gets back to $14.20 by 2029. Getting back is a return to a level already earned at today's prices, not growth. It rests on the replacement nature of demand: systems put off in 2025 still have to be replaced. Acquisitions. For more than three decades Watsco has grown by buying regional distributors and keeping their names and managers. Two new deals are signed and committed. Jackson Supply closed on June 2, 2026: about $230 million of sales from 25 branches in Texas, Louisiana, Tennessee, Alabama, Mississippi, Oklahoma and Arizona. The Granite Group was signed in September 2026 for $505 million, 80% in cash and 20% in Watsco stock: about $500 million of sales from 82 branches in New Hampshire, Vermont, Maine, Massachusetts, Connecticut, Rhode Island and New York, still waiting on antitrust clearance. Neither has disclosed earnings. The base case credits them with owner earnings of 5% of sales, below Watsco's own roughly 8%, because Granite sells a lot of plumbing. They get 3% in the bear case and 6-6.5% in the bull case. Granite was announced after our previous analysis. Those earlier figures were built on a different basis and are not comparable. Base case, $355 per share. After the recovery, earnings from the existing business grow 4% a year from 2030 through 2035. About 2.5% comes from passing equipment price increases through to customers, which Watsco has done for decades while keeping gross margin in the mid-to-high 20s (28.0% in 2025). About 1.5% a share comes from small tuck-in acquisitions at the pace the company has kept up, partly paid for with stock. The acquired businesses grow 2.5% a year. After 2035, earnings grow 1.5% a year, kept going by the replacement of a large and growing installed base of systems. On this path the business is worth about $13.7 billion. Bear case, $238 per share. A housing and consumer downturn like 2006-2009 hits in the next few years. In that episode Watsco's diluted earnings per share fell from $2.86 in 2006 to $2.09 in 2008, down 27%. They fell to $1.40 in 2009, a year also weighed down by the costs of forming the Carrier venture, then recovered to $2.49 in 2010. This case cuts the existing business 15%, 30% and 35% below the starting point in 2026-2028, to about $9.50 a share in total. It recovers only to 95% of the starting point by 2032, grows 1.5% a year to 2035 and 0.5% after that. The acquired businesses earn only 3% margins and fall with the cycle. On this path the business is worth about $9.2 billion. Bull case, $523 per share. Volumes recover quickly. The existing business is back at the starting point in 2027 and 5% above it in 2028. It then grows 6% a year through 2035 as Watsco keeps buying at its 2026 pace (Jackson and Granite together add about 10% to sales in one year), on top of passing through price increases. Growth after 2035 is 2.5% a year. On this path the business is worth about $20.2 billion. Balance sheet. Watsco has no bonds and had nothing drawn on its $600 million revolving credit line (due March 2028) at the end of 2025. At June 30, 2026 it held $364 million of cash and $100 million of short-term deposits. Against that it had about $120 million of current obligations and $9 million of finance leases. No cash for the Jackson deal shows up in investing cash flow, so these obligations probably relate to that purchase. We keep $100 million as operating cash and count Watsco's share of the rest. We add Watsco's share of the 38.4% stake in Russell Sigler, a Carrier distributor in the western US with $1.2 billion of sales, at about $155 million of book value, because Watsco receives none of its earnings in cash. We subtract the roughly $404 million of cash due when Granite closes. Altogether Watsco owes about $70 million more than its spare cash and investments. That leaves the bear case at about $9.2 billion less $0.07 billion, the base case at about $13.7 billion less $0.07 billion, and the bull case at about $20.2 billion less $0.07 billion, spread over about 38.5 million diluted shares once the Granite shares are issued. Russell Sigler's other owners can require Watsco's venture to buy their shares, which were valued at about $440 million at the end of 2025. Purchases from the majority holders are capped at $125 million a year, and Watsco can pay up to 80% in its own stock. We treat this as swapping cash for a business of similar value, not as a loss. Amortization of acquired intangibles is about $5 million a year, too small to matter. What could make this wrong. The Carrier relationship is the single biggest exposure. A change in how Carrier chooses to distribute its products would hurt more than any downturn. A longer slump in replacement demand would also push back the recovery. Granite could turn out to earn less than we assume. Watsco also pays out almost all of its owner earnings as dividends, so most growth beyond pricing has to come from acquisitions paid for with stock or borrowing. Margin-of-safety price, $200. We are fairly confident in the earnings level. Owner earnings have stayed between $12 and $17 a share for five years, the company has no funded debt, demand is mostly replacement, and Watsco has paid dividends for 52 straight years. The worst plausible outcome is a deep housing and consumer recession arriving at the same time as Carrier changing its distribution strategy. With no debt and branches it can close, the business would survive that, but earnings could drop by more than a third for several years. If we are wrong about both the recovery and all future growth, so the existing business simply stays at $14.20 a share forever and the acquisitions earn 5%, the shares are worth about $247. Over the holding period, the dividend of $3.30 a quarter ($13.20 a year) continues. From $200, the bear-case value plus one year of dividends implies more than a 20% return in one year. Over three years, the shares only have to be valued near $300, well short of the base case, for the implied return to reach about 20% with dividends. Above about $210, the one-year bear-case outcome no longer reaches 20%. That is why the margin-of-safety price is $200.