Equipment distributor Watsco (NYSE: WSO) missed Wall Street’s revenue expectations in Q4 CY2025, with sales falling 10% year on year to $1.58 billion. Its GAAP profit of $1.68 per share was 11% below analysts’ consensus estimates.
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Watsco (WSO) Q4 CY2025 Highlights:
- Revenue: $1.58 billion vs analyst estimates of $1.61 billion (10% year-on-year decline, 1.9% miss)
- EPS (GAAP): $1.68 vs analyst expectations of $1.89 (11% miss)
- Adjusted EBITDA: $121.3 million vs analyst estimates of $128.8 million (7.7% margin, 5.9% miss)
- Operating Margin: 6.4%, down from 7.8% in the same quarter last year
- Free Cash Flow Margin: 24.6%, up from 21.1% in the same quarter last year
- Market Capitalization: $15.86 billion
Company Overview
Originally a manufacturing company, Watsco (NYSE: WSO) today only distributes air conditioning, heating, and refrigeration equipment, as well as related parts and supplies.
Revenue Growth
A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Watsco’s 7.4% annualized revenue growth over the last five years was mediocre. This fell short of our benchmark for the industrials sector and is a poor baseline for our analysis.
We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Watsco’s recent performance shows its demand has slowed as its revenue was flat over the last two years. 
This quarter, Watsco missed Wall Street’s estimates and reported a rather uninspiring 10% year-on-year revenue decline, generating $1.58 billion of revenue.
Looking ahead, sell-side analysts expect revenue to grow 3.8% over the next 12 months. Although this projection implies its newer products and services will catalyze better top-line performance, it is still below average for the sector.
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Operating Margin
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Watsco’s operating margin might fluctuated slightly over the last 12 months but has remained more or less the same, averaging 10.5% over the last five years. This profitability was solid for an industrials business and shows it’s an efficient company that manages its expenses well. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.
Analyzing the trend in its profitability, Watsco’s operating margin might fluctuated slightly but has generally stayed the same 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 Q4, Watsco generated an operating margin profit margin of 6.4%, down 1.3 percentage points year on year. Since Watsco’s operating margin decreased more than its gross margin, we can assume it was less efficient because 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 sales through excessive spending on advertising and promotions.
Watsco’s EPS grew at a remarkable 12% compounded annual growth rate over the last five years, higher than its 7.4% annualized revenue growth. However, we take this with a grain of salt because its operating margin didn’t improve and it didn’t repurchase its shares, meaning the delta came from reduced interest expenses or taxes.
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 two-year annual EPS declines of 5.8% were bad and lower than its flat revenue.
Diving into the nuances of Watsco’s earnings can give us a better understanding of its performance. A two-year view shows Watsco has diluted its shareholders, growing its share count by 3%. This has led to lower per share earnings. Taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals. 
In Q4, Watsco reported EPS of $1.68, down from $2.37 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Watsco’s full-year EPS of $12.11 to grow 8.1%.
Key Takeaways from Watsco’s Q4 Results
We struggled to find many positives in these results. Its EBITDA missed and its EPS fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock traded down 1.9% to $410.00 immediately following the results.
Watsco underperformed this quarter, but does that create an opportunity to invest right now? When making that decision, it’s important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here (it’s free).
