Over the past six months, Watsco has been a great trade, beating the S&P 500 by 15%. Its stock price has climbed to $432.07, representing a healthy 22.9% increase. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Watsco, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Watsco Not Exciting?
We’re happy investors have made money, but we're sitting this one out for now. Here are three reasons why WSO doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, Watsco’s 6.9% annualized revenue growth over the last five years was mediocre. This was below our standard for the industrials sector.
2. EPS Took a Dip Over the Last Two Years
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
Sadly for Watsco, its EPS declined by 3.7% annually over the last two years while its revenue was flat. This tells us the company struggled to adjust to choppy demand.
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).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. 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
Watsco isn’t a terrible business, but it isn’t one of our picks. With its shares topping the market in recent months, the stock trades at 33.2× forward P/E (or $432.07 per share). At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.
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