Watsco’s third quarter was marked by a notable decline in sales, but the market responded positively as management attributed the performance to the industry-wide transition to next-generation A2L refrigerant products. CEO Albert Nahmad emphasized that this transition, which disrupted roughly half the product portfolio, was largely complete by quarter’s end and described the period as one of “volatility” but not long-term weakness. Management pointed to increased pricing on new products, growth in non-equipment and commercial refrigeration sales, and record cash flow as key factors helping to offset subdued unit volumes.
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Watsco (WSO) Q3 CY2025 Highlights:
- Revenue: $2.07 billion vs analyst estimates of $2.12 billion (4.3% year-on-year decline, 2.6% miss)
- Adjusted EPS: $3.98 vs analyst expectations of $4.22 (5.7% miss)
- Adjusted EBITDA: $245.8 million vs analyst estimates of $264.1 million (11.9% margin, 6.9% miss)
- Operating Margin: 11.4%, in line with the same quarter last year
- Same-Store Sales fell 4.2% year on year, in line with the same quarter last year
- Market Capitalization: $13.63 billion
While we enjoy listening to the management's commentary, our favorite part of earnings calls are the analyst questions. Those are unscripted and can often highlight topics that management teams would rather avoid or topics where the answer is complicated. Here is what has caught our attention.
Our Top 5 Analyst Questions From Watsco’s Q3 Earnings Call
- Thomas Moll (Stephens) asked whether the repair versus replace dynamic was driving non-equipment growth. President Paul Johnston explained the trend reflected regional differences and contractor practices rather than a simple trade-off, noting Sunbelt markets favored replacement while northern regions leaned toward repairs.
- Ryan Merkel (William Blair) pressed for details on the shape of the quarter and drivers behind volume declines in August and September. CFO Barry Logan cited new construction weakness and consumer hesitation on large purchases as the largest contributors, with management viewing these as short-term factors.
- David Manthey (Baird) questioned whether persistent softness might prompt more aggressive share buybacks. CEO Albert Nahmad responded that while buybacks were considered, the capital may be better used for acquisitions as softer industry conditions could create attractive targets.
- Mitchell Moore (KeyBanc) asked about consumer trade-down to lower-tier products amid affordability pressures. Johnston confirmed a migration to baseline efficiency models but highlighted that OnCallAir users were selling more high-efficiency systems, indicating the impact of digital tools on product mix.
- Nigel Coe (Wolfe Research) inquired about the impact of A2L transition costs and whether higher prices were limiting replacements. Johnston acknowledged the increased costs but argued broader macro factors like low consumer confidence and housing activity had a greater influence.
Catalysts in Upcoming Quarters
In the coming quarters, our analysts will be monitoring (1) the pace at which demand normalizes following the A2L transition, (2) further improvements in gross margins and inventory turns as technology initiatives scale, and (3) progress in non-equipment and institutional sales channels. Additionally, any strategic acquisitions or acceleration in digital adoption will be important markers for Watsco’s ability to execute its growth strategy.
Watsco currently trades at $358.33, in line with $358.52 just before the earnings. Is there an opportunity in the stock?See for yourself in our full research report (it’s free for active Edge members).
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