Thirty exceptional years

Listed since the 1960s, Watsco is no newcomer to the stock market. The group can boast an exceptional track record on the markets. In fact, it is one of only 24 companies to have generated a return of 19% or more per annum over the last thirty years. Over the same period, it even ranks 16th among the 1,600 companies that have generated the best returns for shareholders.

However, Watsco is relatively unknown to the general public, at least internationally. The Floridian company has always remained firmly rooted in its home country, where it generates 90% of its sales. Canada accounts for 5%, as much as Latin America and the Caribbean combined.

No MOAT, but very solid assets

A MOAT is a sustainable competitive advantage. Examples include Microsoft software, which is installed as standard on the vast majority of computers sold worldwide, or Coca-Cola, whose brand is recognized worldwide.

Watsco is not on that level. The company operates in a complicated, highly fragmented market, where the battle between selling prices and costs is incessant. Nevertheless, Watsco has now become the leading player in its field, with a market share of between 15% and 18%. The company's territorial coverage is already highly effective, with 691 warehousing and distribution facilities.

Watsco in 1989 vs. 2024. The company has built a serious moat around its castle (source: Watsco annual report).

Let's talk numbers

As is often the case, the quality of a listed company's performance can be seen in its published figures. Over the last ten years (2014-2023), revenues have risen from $3.9 billion to $7.3 billion. Margins soared during the Covid, as the group managed to implement various price increases against a backdrop of high inflation. Since then, volumes have not faltered, and business levels are at record levels. It is underpinned in particular by replacement equipment (between 65% and 70% of sales) linked to the ageing installed base of central air conditioners and residential boilers (average life expectancy of the latter is between 15 and 25 years).(average lifespan between 8 and 20 years), as well as new standards and the introduction of more energy-efficient and cost-effective models. The replacement market is less cyclical than the new-build market (which accounts for 10-15% of sales; the remainder (15-20%) depends on the commercial sector), as requirements are more regular and less dependent on the economic context.

Over the period, earnings per share (EPS) increased by a factor of 3.2. Free cash flow by a factor of 3, and all this with negligible debt. At the same time, the share price has risen from $100 to $471, to which must be added a steadily rising dividend offering a yield of around 2.3%. The creation of shareholder value is therefore impressive, all the more so as it has been achieved with a perfectly preserved balance sheet, which should enable the sector to consolidate further in the years to come.

Waiting for a better entry?

The share price is currently trading above analysts' average target. JPMorgan, in a very positive article on the stock, believes that the current valuation is relatively high in a market context that seems to have reached record volumes and margins. Nor should we underestimate possible temporary headwinds in a still highly inflationary climate which, for the time being, limits visibility over the coming quarters. In this context, the current valuation, which easily exceeds 30 times earnings, seems slightly overvalued. On this ultra-quality dossier, a pullback in the stock could therefore be put to good use from a long-term perspective.

Watsco vs S&P500 (source: Zonebourse)