Watsco (WSO) Bearish Signal: Time to Buy Puts?

Watsco is the largest distributor of air conditioning, heating, and refrigeration equipment and related parts and supplies ('HVAC/R') in North America. The company operates through 690 locations, serving over 130,000 active contractors in the replacement and new construction markets for both residential and commercial applications. Watsco offers an expansive product line including residential ducted and ductless air conditioners, furnaces, commercial air conditioning and heating equipment, replacement compressors, evaporator coils, thermostats, insulation, refrigerants, and ductwork. Watsco's business strategy centers on a 'buy and build' philosophy, acquiring market leaders and fostering growth through product expansion, new locations, technology investment, and knowledge sharing. The company differentiates itself through customer service, broad product lines, well-stocked inventories, warehouse location density, and technical expertise, catering to the immediate and convenient service demands of the higher-growth replacement market. Watsco also leverages technology, including mobile applications and e-commerce platforms, to enhance customer service and streamline operations.

No relevant news was found for this stock today.

WSO's technical outlook is bearish. The stock price has declined significantly over the past 90 days from approximately $435 to $358.35, indicating a strong downtrend. It is trading below its 50-day SMA (410.36) and 200-day SMA (455.10) which further confirms the bearish trend. The EMA_21 is at 371.25. Momentum indicators also suggest weakness. The MACD (-8.34) is below its signal line (-8.96) and while MACDh is positive (0.62), the overall MACD remains negative, indicating bearish momentum. The RSI is 42.70, signaling that the stock is not yet oversold, suggesting further downside potential. The Stochastic Oscillator (35.89) is also low, confirming the bearish momentum. The ADX at 24.22 indicates a weak trend, however, the recent price action and continued downtrend suggest that the bearish momentum may continue in the short to medium term. The recent price action shows a clear downtrend with no signs of reversal. Given these factors, the likely direction over the next 1–3 months is downward.

Watsco's MD&A presents a mixed picture. For the second quarter of 2025, `Net Sales` decreased by 4% to $2,062.4 million compared to $2,139.3 million in 2024. However, `Gross Profit` margin improved to 29.3% from 27.1% due to 'the timing and extent of OEM pricing actions as well as margin increases across several product categories attributable to further scaling of our pricing technologies'. For the six months ended June 30, 2025, `Net cash (used in) provided by operating activities` was $(185.1) million, a significant decrease from the $161.4 million provided in the same period of 2024, primarily due to higher inventory balances and the timing of vendor payments. The company attributes the revenue decrease to 'temperate weather conditions, lower home building activity, and A2L product transition-related impacts on new system installations'. While the company believes its 'focus on the HVAC replacement market remains a stabilizing factor', the impact of potential future tariffs remains uncertain. Furthermore, the U.S. Inflation Reduction Act of 2022 tax credits for HVAC systems were eliminated after December 31, 2025, which could impact future sales.

Watsco's Q2 2025 earnings call reveals a mixed performance amid a significant industry transition to A2L refrigerants. While the company achieved record gross profit margins, sales declined 4%, with management attributing this to 'soft market conditions' and a late start to the summer season. Residential new construction and international markets also remained weak, impacting overall volumes. Management's tone suggests cautious optimism, acknowledging challenges while emphasizing factors within their control. As Barry Logan stated, 'We like what we can control. We'll be patient about what we can't control.' Inventory levels are higher than desired, peaking at $2 billion, but the company is actively working to reduce them, already decreasing by $200 million in Q3. SG&A expenses increased 6% due to transition costs and acquisitions. Looking ahead, management anticipates improved performance in July and August, but acknowledges the need for continued progress. The company is focused on improving inventory turns and aims to achieve a 'Dream plan 2' with $10 billion in revenue, 30% gross profit margin, and 5x inventory turn. M&A opportunities are being actively pursued, with potential deals on the horizon.

WSO's financial performance presents a moderately positive picture. Revenue has generally increased from $1,564.99M in Q1 2024 to $2,067.01M in Q3 2025, indicating top-line growth. Gross profit margins have fluctuated, starting at 0.275 in Q1 2024 and reaching 0.288 in the most recent quarter, suggesting inconsistent profitability. Operating cash flow has varied significantly, with a recent positive surge to $354.94M in Q3 2025 after a negative value of -$177.64M in Q1 2025, highlighting volatility in cash generation. Total debt has decreased from $409.21M in Q1 2024 to $328.19M in Q3 2025, indicating improved solvency. While revenue growth and a recent positive operating cash flow are encouraging, the inconsistent profitability and volatile cash flow require further scrutiny to determine long-term financial stability.

The company demonstrates a moderately bullish profile, characterized by solid revenue growth and improving profitability. Revenue has consistently increased, indicating strong market demand. The gross margin exhibits stability, suggesting effective cost management. Return on Equity (ROE) has improved, showcasing efficient capital allocation. While the Price-to-Earnings (P/E) ratio is elevated, it is potentially justified by the company's growth prospects. The Debt-to-Equity ratio has decreased, reflecting a healthier balance sheet and reduced financial risk. The current ratio is at a healthy level, implying sufficient liquidity to meet short-term obligations. Overall, the company presents a favorable combination of growth, profitability, and balance sheet strength, supporting a positive outlook for the next 12 months, although the high P/E ratio warrants close monitoring.