Watsco Inc (WSO, Financial), the largest heating, ventilation, air-conditioning, and refrigeration products distributor in North America, saw its stock rise by 6.19% on September 27, 2023. Despite a modest 3-month gain of 1.16%, the company reported an impressive Earnings Per Share (EPS) of 14.59. However, a critical question lingers: is Watsco Inc's stock modestly overvalued? This article provides an in-depth valuation analysis to answer that question. Read on to understand Watsco Inc's intrinsic value better.
Company Overview
Watsco Inc (WSO, Financial) primarily operates in the United States, accounting for 91% of its 2022 revenue, with significant exposure in the Sunbelt states. The company also has operations in Canada (5% of sales) and Latin America and the Caribbean (4% of sales). Watsco's customer base consists of over 120,000 dealers and contractors serving the replacement and new construction HVACR markets for residential and light commercial applications. Despite a current stock price of $377.74, Watsco's fair value, according to the GF Value, is estimated at $330.29.
Understanding GF Value
The GF Value is a unique measure of a stock's intrinsic value, calculated based on historical multiples, a GuruFocus adjustment factor based on the company's past performance and growth, and future estimates of business performance. The GF Value Line on our summary page provides an overview of the stock's fair value. If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Based on GuruFocus' valuation method, Watsco (WSO, Financial) stock is modestly overvalued. This suggests that the long-term return of its stock is likely to be lower than its business growth.
Financial Strength
It's crucial to assess a company's financial strength before investing. Companies with poor financial strength pose a higher risk of permanent loss. Watsco's cash-to-debt ratio of 0.23 is worse than 61.22% of 147 companies in the Industrial Distribution industry. However, the overall financial strength of Watsco is 8 out of 10, indicating strong financial health.
Profitability and Growth
Investing in profitable companies carries less risk. Watsco has been profitable for 10 years over the past decade. With revenues of $7.20 billion and an Earnings Per Share (EPS) of $14.59 in the past 12 months, Watsco's operating margin of 11.04% is better than 75.33% of 150 companies in the Industrial Distribution industry. Overall, GuruFocus ranks Watsco's profitability as strong.
Growth is a crucial factor in a company's valuation. Watsco's 3-year average revenue growth rate is better than 72.92% of 144 companies in the Industrial Distribution industry. Its 3-year average EBITDA growth rate is 28.9%, which ranks better than 75.97% of 129 companies in the same industry.
ROIC vs WACC
Comparing a company's Return on Invested Capital (ROIC) and Weighted Average Cost of Capital (WACC) is another way to assess its profitability. For the past 12 months, Watsco's ROIC is 24.45, and its WACC is 10.6, indicating a healthy return on invested capital.
Conclusion
In conclusion, Watsco (WSO, Financial) stock is estimated to be modestly overvalued. Despite this, the company's financial condition is strong, and its profitability is robust. Its growth ranks better than 75.97% of 129 companies in the Industrial Distribution industry. To learn more about Watsco stock, check out its 30-Year Financials here.
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