Watsco’s stock tumbled 3.45% to $448.76 following disappointing quarterly results, approaching its 52-week low of $418.31. The HVAC distributor significantly missed analyst expectations with earnings per share of $4.52, falling 5.83% below the forecasted $4.80, while revenue declined 4% to $2.06 billion, missing estimates by 7.62%. The primary challenge stemmed from the transition to environmentally friendly A2L refrigerants, affecting 55% of historical product sales. These greener systems now represent 60% of domestic sales, up dramatically from 25% in the first quarter. Additional headwinds included cooler weather suppressing air conditioner demand, a 15-20% reduction in residential construction, and weakness in international markets, with Mexico alone reducing earnings by ten cents per share.
Margin Strength Offers Hope
Despite volume challenges, Watsco achieved record gross margins of 29.3%, improving 220 basis points year-over-year, while operating income increased 1% to $272 million. This performance was driven by manufacturer price increases and the company’s PriceFX optimization platform. E-commerce growth continued, reaching $2.5 billion or 34% of total sales, with mobile app users increasing 17% to 70,000. The company maintains a strong financial position with $293 million in cash, no debt, and recently increased its dividend by 11% to $12 per share.
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