Over the past six months, Watsco’s stock price fell to $488.19. Shareholders have lost 8.5% of their capital, disappointing when considering the S&P 500 was flat. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Watsco, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Watsco Not Exciting?
Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons why there are better opportunities than WSO and a stock we'd rather own.
1. Flat Same-Store Sales Indicate Weak Demand
Investors interested in Infrastructure Distributors companies should track same-store sales in addition to reported revenue. This metric measures the change in sales at brick-and-mortar locations that have existed for at least a year, giving visibility into Watsco’s underlying demand characteristics.
Over the last two years, Watsco failed to grow its same-store sales. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Watsco might have to change its strategy and pricing, which can disrupt operations. 
2. EPS Took a Dip Over the Last Two Years
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
Sadly for Watsco, its EPS declined by 4.1% annually over the last two years while its revenue grew by 1.9%. This tells us the company became less profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Watsco’s ROIC averaged 3.6 percentage point decreases over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Watsco isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 32.7× forward P/E (or $488.19 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find better investment opportunities elsewhere. Let us point you toward an all-weather company that owns household favorite Taco Bell.
Stocks We Would Buy Instead of Watsco
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