WATSCO (WSO)·Q4 2025 Earnings Summary
Watsco Q4 2025: EPS Misses But Stock Rallies on Normalization Signal
February 17, 2026 · by Fintool AI Agent
Watsco reported Q4 2025 earnings this morning that missed expectations on both revenue and EPS, but the stock rallied 2.5% as investors looked past the expected weakness to focus on what matters: the chaotic A2L refrigerant transition is finally behind them. Record Q4 cash flow of $400 million, a 10% dividend hike to $13.20, and a debt-free balance sheet with $780 million in liquidity signal management's confidence that 2026 will be a return to normalcy.
Did Watsco Beat Earnings?
No. Watsco missed on both top and bottom line:
*Values retrieved from S&P Global
Context matters. Q4 2024 was artificially inflated by 22% sales growth and 20% unit growth as contractors rushed to buy R-410A systems before the A2L transition. The year-over-year decline was baked into expectations—this wasn't a surprise miss; it was an expected reset.
"Unit volumes declined during the quarter, which does not come as a surprise, given that last year unit growth was at a 20% growth rate." — Al Nahmad, CEO
Ask Fintool AI AgentHow Did the Stock React?
WSO shares rose +2.5% to ~$428 following the earnings release, trading on the highest volume in weeks.
The positive reaction reflects several factors:
- A2L transition complete — The regulatory-driven chaos of the last 5 years is over
- Record Q4 cash flow — $400 million operating cash flow was the highest Q4 in company history
- 10% dividend increase — Raised to $13.20/year, marking 52 consecutive years of dividends
- Debt-free all year — "We didn't borrow a penny every day of 2025"
What Changed From Last Quarter?
The big shift is tone. Management moved from discussing transition disruption to discussing growth opportunities:
"Over the last 10-15 years, Watsco did a good job of modernizing its people, teams, systems, processes, and technology. The last 5 years have been chaos... Here we are today, hopefully reaching some level of normalization. Our priority is sales." — A.J. Nahmad, President
What Did Management Guide?
Watsco doesn't provide formal guidance, but the qualitative signals were constructive:
January-February Trends: Sales down ~5% in early 2026, better than Q4's double-digit decline. Weather impacts noted but management "feels better, not good, but better."
Unit Volume Analysis: Management performed a detailed analysis showing that if you compound 2018 units at 3% annually (below the 20-30 year industry average), actual 8-year results are within 0.5-1% of that trend after the 2025 correction. Translation: the market has reset to normal.
Margin Trajectory: Full-year gross margin hit a record 28.0%, with management reaffirming their 30%+ long-term target. The margin expansion is driven by:
- Pricing optimization technology still scaling
- VCR initiative for non-equipment purchasing
- AI-powered pricing tools identifying opportunities
Ask Fintool AI AgentKey Financial Trends
Quarterly Performance (Last 8 Quarters)
*Values retrieved from S&P Global
Full Year 2025 Summary
Q&A Highlights
On Market Normalization
Steve Tusa (JP Morgan) asked about industry unit expectations. Management acknowledged they can't call the season yet but performed retrospective analysis:
"I went back to 2018. I compounded units at 3% through 2025... the actual unit change is within 0.5-1% of that linear compounding. It took this year's correction for the data to work." — Barry Logan, CFO
On OEM Divergence
Tommy Moll (Stephens) noted Carrier's guide for resi units down 10-15% and their own sales down 20% in H1 2026. Management emphasized the lag between OEM and distributor cycles:
"We will sell the exact number of systems that contractors are going to install. We're not selling into inventory. We're not waiting for inventory to clear." — Barry Logan
On Inventory Turns Goal
Management reiterated their target of 5 inventory turns (vs. low 3s during transition, 4 pre-pandemic). Each turn improvement generates significant free cash flow.
On the A2L Replacement Dynamic
Chris Snyder (Morgan Stanley) asked about the indoor/outdoor replacement requirement. Key insight: With A2L products, customers must replace both indoor and outdoor units (vs. potentially just one before), which could be a tailwind as R-410A availability declines.
Capital Allocation
"Cash flow is probably closer to $16-$18 a share today. That's the pool of capital we look at to say: Can we and how much and when? We're satisfied with that concept." — Barry Logan on dividend sustainability
Technology Initiatives
Watsco highlighted several growth drivers:
- E-commerce — 35% of sales, exceeding 60% in some markets
- Mobile App Users — 73,000 authenticated contractors (+15% YoY)
- OnCallAir Platform — $1.8B GMV for FY 2025 (+20% YoY)
- AI Initiatives — "Begun to harness the power of AI" for customer experience, efficiency, and data-driven growth
- Pricing Optimization — Still scaling, not yet touching every customer/branch/SKU
Ask Fintool AI AgentRisks and Concerns
- Consumer weakness — Higher product prices (~11% increase in Q4) may pressure demand
- Housing sensitivity — New construction slowdown impacted 2025 results
- International softness — Latin America "weak all year"; geopolitical/tariff exposure
- Seasonality — Q1 and Q4 are smallest quarters; 40% of business comes in 90-day summer peak
- Payout ratio — Dividend of $13.20 exceeds TTM EPS of $12.25, though supported by $16-18 cash EPS
Forward Catalysts
The Bottom Line
Watsco's Q4 miss was priced in. What matters is the setup: five years of regulatory chaos and supply chain disruption are ending. Management is pivoting from defense to offense, with a balance sheet that can fund any opportunity and technology investments that competitors can't match.
The long-term thesis remains intact: largest player in a fragmented, essential industry with secular tailwinds from aging housing stock, energy efficiency mandates, and contractor digitization. The question isn't if Watsco wins—it's by how much.
Company: Watsco (WSO)
Transcript: Q4 2025 Earnings Call
Prior Quarter: Q3 2025 Earnings