Watsco’s Record Results Continue, but We See Moderating Growth and Profitability Ahead

Watsco reported strong third-quarter results that nevertheless missed consensus expectations for the narrow-moat-rated distributor of heating, ventilation, air-conditioning, and refrigeration products. Indeed, while revenue grew 14% year over year (to over $2 billion) and EPS of $4.03 increased 11%, reported revenue and EPS fell about 1% and 9% below FactSet consensus estimates, respectively. Watsco’s third-quarter results largely met our expectations, although operating margin came in a bit lighter than we were modeling (11.6% compared with our 11.9% projection). We believe Watsco’s lower-than-consensus third-quarter EPS was likely due to the firm’s gross margin, which contracted 80 basis points sequentially (although flat year over year) to 27.1%.