Watsco is the largest distributor of residential and light-commercial heating, ventilation, air-conditioning and refrigeration (HVAC/R) equipment, parts and supplies in the Americas, with 723 locations at 30 June 2026. FY25 revenue was $7.24bn: HVAC equipment 67%, other HVAC products 29% and commercial refrigeration 4%. Its customers are contractors and dealers who replace and install systems, so replacement of the installed base, not new construction, drives most demand. Much of the business runs through consolidated joint ventures with Carrier, which owns 20% (40% in Canada), and Watsco has two share classes, Common and ten-vote Class B.
A long-only client that has owned the stock for a decade wants a fresh, independent view after its worst year in a long time. Gross margin was 28.0% in FY25, helped by the pass-through of large 2025 OEM price increases during the transition to A2L refrigerant systems. In 2Q26 it fell to 27.5% (−180 bp year on year); operating income fell 12.3% and diluted EPS of $4.00 missed a published consensus range of $4.38–$4.51. The shares fell about 13% on 29 July 2026 and closed at $279.90 on 9 October, down from a 52-week high of $459.00.
Volumes have stopped falling: same-store sales fell 5% in FY25, were flat in 1H26 and rose 1% in 2Q26. Watsco bought Jackson Supply on 1 June 2026 for 517,884 shares worth $186.2M and on 12 September 2026 agreed to buy Granite Group for $505.0M, subject to antitrust clearance. The Federal Reserve raised its target range to 3.75–4.00% on 16 September 2026 and the 10-year Treasury closed at 5.24% on 9 October. Watsco pays out roughly all of its earnings as dividends (annual rate $13.20 since April 2026), so it trades partly as a yield stock. The balance sheet holds net cash: $364.2M of cash and $100.0M of Treasury bills at 30 June 2026, with the revolver undrawn.
You are an Associate in the Industrials & Distribution group of an investment bank. The Managing Director wants a written view, and a model they can defend in front of the client: at $279.90, is Watsco now cheap, or has the market simply re-based an over-earning business? Your memo is what gets graded here. The assignment also asks for an integrated FY26E–FY30E model in the student template, which you can attach as a supporting file. The case uses public information only and is a training exercise, not investment advice.
| FY22A | FY23A | FY24A | FY25A | LTM Jun-26 | |
|---|---|---|---|---|---|
| Revenues | 7274.344 | 7283.767 | 7618.317 | 7239.290 | 7283.631 |
| Cost of sales | 5244.055 | 5291.627 | 5573.604 | 5208.826 | 5279.794 |
| Gross profit | 2030.289 | 1992.140 | 2044.713 | 2030.464 | 2003.837 |
| Gross margin | 27.9% | 27.4% | 26.8% | 28.0% | 27.5% |
| Selling, general and administrative (incl. D&A) | 1221.382 | 1223.507 | 1293.439 | 1337.882 | 1348.137 |
| Other income: equity income from Russell Sigler | 22.671 | 26.177 | 30.501 | 27.765 | 29.146 |
| Operating income (EBIT) | 831.578 | 794.810 | 781.775 | 720.347 | 684.846 |
| Depreciation and amortization | 31.683 | 35.090 | 40.822 | 43.752 | 44.008 |
| EBITDA (operating income + D&A), after rent | 863.261 | 829.900 | 822.597 | 764.099 | 728.854 |
| Income taxes | 125.717 | 155.751 | 166.904 | 150.088 | 143.862 |
| Net income attributable to non-controlling interest (Carrier) | 102.529 | 97.802 | 99.454 | 90.594 | 84.793 |
| Net income attributable to Watsco | 601.167 | 536.337 | 536.286 | 496.994 | 475.730 |
| Diluted EPS ($, two-class) | 15.41 | 13.67 | 13.30 | 12.25 | 11.67 |
| Dividends per share paid ($; 6M26 in LTM column) | 8.55 | 9.80 | 10.55 | 11.70 | 6.30 |
| Net cash from operating activities | 571.964 | 561.954 | 773.102 | 569.613 | 733.263 |
| Capital expenditures | (35.652) | (35.478) | (30.090) | (34.550) | (36.122) |
| Dividends on Common and Class B stock | (332.447) | (382.646) | (423.521) | (473.765) | (499.188) |
| Distributions to Carrier (NCI) | (69.184) | (73.019) | 0.000 | (131.197) | (62.367) |
| Accounts receivable, period end | 747.110 | 797.832 | 877.935 | 796.181 | 1060.767 |
| Inventories, period end | 1370.173 | 1347.289 | 1385.436 | 1386.317 | 1890.473 |
| Accounts payable, period end | 456.128 | 369.396 | 490.879 | 350.425 | 660.299 |
| Cash + Treasury bills, period end | 79.717 | 182.498 | 766.465 | 722.264 | 455.121 |
| Non-controlling interest (Carrier, book), period end | 359.041 | 386.351 | 407.248 | 440.685 | 478.797 |
Your call (approve, approve with conditions, or decline), the size and type of loan, and the two or three reasons that decide it.
What the company does and why its cash flow holds up, then the two or three risks that drive the outcome, ranked, each with evidence from the packet.
Pro forma leverage, coverage and free cash flow with the inputs shown, the trend behind them, and what they mean for the lender.
One plausible stress anchored in the company's history or a named shock, carried through to leverage, coverage, liquidity and covenant headroom.
Whether the terms protect the lender against your downside, pricing against the risk, and the changes you would ask for.
The conditions your approval depends on and what would change your mind.
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