Baird has maintained an Outperform rating on Watsco (NYSE: NYSE:WSO), but the firm reduced the stock's price target to $540 from $550.
This adjustment follows Watsco's third-quarter performance, where the company experienced a 4% decline in shares compared to the 1% fall in the S&P 500, due to revenue and gross margin figures that fell short of expectations.
The Baird analyst noted that despite the third-quarter results, Watsco saw a rebound in October with mid-single-digit growth and "meaningful unit growth."
The firm anticipates that Watsco has several avenues to drive future expansion, most notably through the pricing and mix of A2L products, which are expected to contribute positively.
Looking ahead, Baird expressed continued confidence in Watsco's prospects leading into 2025, anticipating strong earnings growth. This outlook is supported by multiple positive factors associated with the company's long-term performance, including consistent demand for replacements, the ability to maintain premium prices, robust returns on capital and equity, and potential growth through mergers and acquisitions.
In other recent news, Watsco, Inc. reported record-breaking sales and net income figures for the third quarter of 2024. The company experienced mid-single-digit sales growth in October, driven by unit increases. E-commerce platforms performed notably, with sales surpassing $2.5 billion, and the OnCall Air digital platform alone generated $1.2 billion, marking a 22% increase from the previous year. Watsco is also preparing for the A2L systems transition in 2025, which is projected to further boost sales numbers.
Despite inventory challenges, the company is focused on improving inventory turnover and operational efficiency. The recent hurricanes had a minimal impact on the business, with an expected increase in repair-related sales. The management targets a long-term gross margin of 30%.
InvestingPro Insights
To complement Baird's analysis, recent data from InvestingPro offers additional context on Watsco's financial position and market performance. The company's market capitalization stands at $17.7 billion, reflecting its significant presence in the HVAC distribution industry. Watsco's P/E ratio of 37.35 indicates that investors are willing to pay a premium for the company's earnings, which aligns with Baird's optimistic outlook on future growth potential.
InvestingPro Tips highlight Watsco's strong financial health and consistent performance. The company has maintained dividend payments for 41 consecutive years and has raised its dividend for 11 consecutive years, demonstrating a commitment to shareholder returns that supports Baird's positive long-term view. This dividend consistency is further reinforced by a current dividend yield of 2.32% and a dividend growth rate of 10.2% over the last twelve months.
Despite the recent 7.59% decline in share price over the past week, which corroborates with the analyst's observation of a 4% drop following Q3 results, Watsco's 1-year price total return stands at an impressive 37.55%. This suggests that the company has delivered strong performance over a longer timeframe, consistent with Baird's confidence in Watsco's fundamentals and growth prospects.
For investors seeking a more comprehensive analysis, InvestingPro offers 13 additional tips on Watsco, providing deeper insights into the company's financial health and market position.
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