Watsco Earnings Miss at $3.77 a Share Despite Record Revenue of $2.22 Billion

Key Facts

Watsco shares fell 4.22% in after-hours trading after the company reported third-quarter results on October 27, with diluted earnings of $3.77 a share, $0.35 below analysts’ estimate of $4.12. Revenue, by contrast, rose 7% year over year to a record $2.22 billion, slightly topping the $2.2 billion estimate. Official results showed net income fell to $182.8 million from $189.2 million in the same period of 2025. The results presented a mixed picture: sales growth alongside lower profitability and pressure on margins. Investing.com coverage attributed to Reuters reported that the stock fell in post-announcement trading.

Earnings per share fell 5% year over year in the quarter, while operating income declined 4% to $225 million. Gross margin narrowed to 26.4% from 27.5% a year earlier, despite higher revenue. The company attributed the margin pressure to customer and end-market mix, the timing of original equipment manufacturers’ pricing actions, and their lower volume compared with 2025. It also pointed to different sales growth in equipment and other products. Watsco said, "Third-quarter gross margin was affected by customer mix, end-market mix, the timing of OEM pricing actions and their lower volume in 2026 compared with 2025."

HVAC equipment, which accounts for 67% of sales, was a major revenue driver: sales rose 5% in the third quarter excluding the impact of acquisitions. Within that business, residential product sales increased 7%, while commercial products declined 5%. The company said residential equipment sales growth came with a 5% increase in units sold and a 2% rise in average selling price. The divergence shows residential demand improving as commercial sales weakened. Overall revenue growth was 7%, slightly exceeding market estimates, but the business mix and margin pressure coincided with declines in net income and earnings per share.

In the first nine months of 2026, Watsco revenue rose 3% to $5.86 billion, while earnings per share fell 7% to $9.72. Over the same period, operating cash flow increased 79% to $304 million. The figures show sales growth diverging from lower earnings, alongside a marked improvement in cash generation from operations. In the first half, the company had reported $21 million of cash used in operations, compared with $185 million in the same period of 2025, an improvement of $164 million. Cash flow strength therefore stood out over the nine months after cash use in the first half, alongside higher overall revenue and lower earnings per share.

The results come as Watsco expands its distribution business through acquisitions. The company announced the completion of its acquisition of The Granite Group on October 12; the group serves about 11,000 customers through 82 locations in seven Northeastern states and has sales of about $500 million. EL7 published a story about Watsco’s acquisition of the group on September 15. The company said The Granite Group and Jackson Supply together will add about 10% to annual revenue, while expanding geographic reach and the mix of products, end markets and customers. The expansion places the two groups’ sales against a backdrop of revenue growth, while the published quarterly results also reflect margin pressure and differing performance in residential and commercial products.

Watsco had described the sector in its second-quarter results as increasingly stable after a period of heavy regulatory transitions, saying the pricing environment had become more normal and end-market demand was stabilizing. In its third-quarter earnings release, Albert Nahmad said the period’s results and early fourth-quarter sales trends "point to continued improvement in end-market demand." The company added that residential unit volumes had returned to growth, while sales trends early in the fourth quarter showed continued momentum. These early indicators provide context for assessing demand after third-quarter results that combined revenue growth with lower profitability. The next sequence of results will focus on sales trends during the fourth quarter and whether the demand improvement described by the company continues.