Over the last six months, Watsco’s shares have sunk to $305.50, producing a disappointing 19.2% loss - a stark contrast to the S&P 500’s 14% gain. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in Watsco, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Watsco Will Underperform?
Even though the stock has become cheaper, we don’t have much confidence in Watsco. Here are three reasons we avoid WSO, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Regrettably, Watsco’s sales grew at a tepid 5.1% compounded annual growth rate over the last five years. This fell short of our benchmark for the industrials sector.
2. EPS Barely Growing
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Watsco’s unimpressive 5.1% 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.
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).
Unfortunately, Watsco’s ROIC has decreased significantly 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
We see the value of companies helping their customers, but in the case of Watsco, we’re out. After the recent drawdown, the stock trades at 24.5× forward P/E (or $305.50 per share). This multiple tells us a lot of good news is priced in - you can find more timely opportunities elsewhere. We’d suggest looking at the Amazon and PayPal of Latin America.
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