Assessing Watsco (WSO) Valuation After Mixed Recent Returns And Analyst Upside Expectations

Watsco (WSO) has been drawing attention after a period of mixed share performance, with the stock showing gains over the month but a negative total return across the past 3 months and year.

See our latest analysis for Watsco.

At a share price of $357.19, Watsco’s recent 7 day share price return of 4.1% contrasts with a 90 day share price decline of 9.9%, while the 5 year total shareholder return of 71.3% reflects a stronger longer term picture.

If Watsco’s recent moves have you reviewing your watchlist, this could be a good moment to cast a wider net and check out fast growing stocks with high insider ownership.

With Watsco trading at $357.19 and sitting at a discount to some intrinsic estimates and analyst targets, the key question is whether the current price leaves potential upside on the table or if the market is already pricing in future growth.

Most Popular Narrative: 12.2% Undervalued

Compared with the last close of $357.19, the most followed narrative points to a fair value of about $406.60, which presents Watsco as undervalued on this view.

The analysts have a consensus price target of $468.636 for Watsco based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $550.0, and the most bearish reporting a price target of just $368.0.

Read the complete narrative.

Curious what kind of revenue trajectory and margin profile sit behind that fair value gap, and why the future P/E is above industry levels? The full narrative lays out a detailed earnings path, the assumed profitability uplift and how a richer multiple ties it all together.

Result: Fair Value of $406.60 (UNDERVALUED)

Have a read of the narrative in full and understand what's behind the forecasts.

However, softer HVAC demand in key Southern markets, along with the risk of an earnings miss over the next two quarters, could quickly challenge this upside story.

Find out about the key risks to this Watsco narrative.

Another View: Earnings Multiple Sends A Different Signal

Our DCF work suggests Watsco is trading at a discount to an intrinsic value estimate of $472.96, yet the market is still pricing the shares on a P/E of 27.8x. That is higher than the US Trade Distributors industry at 21.4x, the peer average at 19.4x, and above a fair ratio of 22.6x.

That gap points to valuation risk if expectations cool, even if the DCF case indicates there could be upside in long term cash flows. It leaves you weighing which perspective seems more realistic for the next few years: the cash flow model, or the earnings multiple the market is using today.

See what the numbers say about this price — find out in our valuation breakdown.

Build Your Own Watsco Narrative

If you see the numbers differently or prefer to stress test the assumptions yourself, you can build a tailored Watsco thesis in minutes with Do it your way.

A good starting point is our analysis highlighting 4 key rewards investors are optimistic about regarding Watsco.

Ready for more investment ideas?

If Watsco is on your radar, do not stop there. Broaden your opportunity set with a few focused screeners that surface different types of potential ideas.

• Spot potential value candidates by scanning these 877 undervalued stocks based on cash flows that currently trade below their estimated cash flow based prices.
• Ride major technology trends by checking out these 25 AI penny stocks that are tied to artificial intelligence themes.
• Target regular income by reviewing these 11 dividend stocks with yields > 3% that offer higher starting yields.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com