Watsco (NYSE:WSO) posts Q3 2026 sales in line with estimates but GAAP-EPS misses

Equipment distributor Watsco (NYSE:WSO) met Wall Street’s revenue expectations in Q3 2026, with revenue rising 7.4% year on year to $2.22 billion. Its GAAP profit of $3.77 per share was 8.2% below analysts’ consensus estimates.

For more on Watsco, read our full research report, available free.

Albert H. Nahmad, chairman and CEO, said: “Third quarter results and early fourth quarter sales trends are indicative of continued improvement in end-market demand. We are encouraged to see residential unit volumes return to growth and steadily improve throughout the season. Our technology-enabled customers also continue to outperform the broader contractor community. Looking ahead, Watsco today is a meaningfully larger company, having added 107 locations and $730 million in annualized revenue to our network through the acquisitions of Jackson and Granite. Our long-range objectives for sales, margin and cash flow generation remain fully intact.”

Revenue growth

A company’s long-term revenue performance is one signal of its overall quality. Any business can deliver a good quarter or two, but the best consistently grow over the long haul. Watsco’s revenue grew at a tepid 4.7% compounded annual growth rate over the last five years, falling short of our standard for the industrials sector.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Watsco’s recent performance shows its demand has slowed as its revenue was flat over the last two years.

This quarter, Watsco grew its revenue by 7.4% year on year, and its $2.22 billion of revenue was in line with Wall Street’s consensus estimates.

Looking ahead, sell-side analysts expect revenue to grow 7.2% over the next 12 months, according to S&P. Although this projection indicates its newer products and services will improve revenue performance, it is still below the sector average.

Operating margin

Operating margin is one of the best measures of profitability because it tells us how much money a company earns after procuring and manufacturing its products, marketing and selling those products and, most importantly, keeping them relevant through research and development.

Watsco has managed its cost base well over the last five years. It demonstrated solid profitability for an industrials business, producing an average operating margin of 10.4%. This result was particularly impressive given its low gross margin, which is largely determined by what it sells and requires substantial shifts to change meaningfully. Companies have more control over their operating margins, and high operating margins despite low gross margins are a sign of well-managed operations.

Analyzing the trend in its profitability, Watsco’s operating margin decreased by 2.3 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q3, Watsco generated an operating margin of 10.1%, down 1.2 percentage points year on year. Its operating margin declined more than its gross margin, suggesting it was less efficient as expenses such as marketing, R&D and administrative overhead increased.

Earnings per share

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth. For example, a company could inflate its revenue through excessive spending on advertising and promotions.

Watsco’s weak 2.8% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

Watsco’s EPS declined at an annual rate of 6.5% over the last two years, a poor result that trailed its flat revenue.

Diving into the nuances of Watsco’s earnings can give us a better understanding of its performance. Watsco’s operating margin has declined over the last two years while its share count has grown 2.4%. This means the company not only became less efficient with its operating expenses but also diluted its shareholders.

In Q3, Watsco reported EPS of $3.77, down from $3.98 in the same quarter last year. This result missed analysts’ consensus estimates. Over the next 12 months, Wall Street expects Watsco’s full-year EPS to grow 9.8% from $11.32 to $12.42, according to S&P.

Key takeaways from Watsco’s Q3 results

Watsco’s weaker quarter offered few positives. Shares tumbled 7.2% to $283.34 immediately after the results.

Watsco may have had a tough quarter, but is the stock worth buying at the current price? The latest quarter matters, but not nearly as much as longer-term fundamentals and valuation when deciding if the stock is a buy. For more on Watsco, read the full research report here (it’s free).