Equipment distributor Watsco (NYSE: WSO) fell short of the market’s revenue expectations in Q2 CY2026 as sales rose 2.1% year on year to $2.10 billion. Its GAAP profit of $4 per share was 8.8% below analysts’ consensus estimates.
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Watsco (WSO) Q2 CY2026 Highlights:
- Revenue: $2.10 billion vs analyst estimates of $2.14 billion (2.1% year-on-year growth, 1.9% miss)
- EPS (GAAP): $4 vs analyst expectations of $4.39 (8.8% miss)
- Operating Margin: 11.3%, down from 13.2% in the same quarter last year
- Free Cash Flow was -$11.57 million compared to -$14.04 million in the same quarter last year
- Market Capitalization: $14.14 billion
Albert H. Nahmad, Chairman and CEO said: “Our performance during the second quarter is indicative of improving end-market stability after a busy period of regulatory transitions. We are now operating in a more conventional environment in which Watsco’s scale, OEM relationships, and technology investments can add even more value.”
Company Overview
Originally a manufacturing company, Watsco (NYSE: WSO) today only distributes air conditioning, heating, and refrigeration equipment, as well as related parts and supplies.
Revenue Growth
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, Watsco’s 5.1% annualized revenue growth over the last five years was tepid. This fell short of our benchmark for the industrials sector and is a tough starting point for our analysis.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Watsco’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 1% annually. 
This quarter, Watsco’s revenue grew by 2.1% year on year to $2.10 billion, falling short of Wall Street’s estimates.
Looking ahead, sell-side analysts expect revenue to grow 7.4% over the next 12 months. Although this projection suggests its newer products and services will fuel better top-line performance, it is still below average for the sector.
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Operating Margin
Watsco has managed its cost base well over the last five years. It demonstrated solid profitability for an industrials business, producing an average operating margin of 10.5%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.
Looking at the trend in its profitability, Watsco’s operating margin decreased by 1.9 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.
This quarter, Watsco generated an operating margin profit margin of 11.3%, down 1.9 percentage points year on year. Since Watsco’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.
Earnings Per Share
Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth — for example, a company could inflate its sales through excessive spending on advertising and promotions.
Watsco’s unimpressive 5.1% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.
Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.
Watsco’s two-year annual EPS declines of 6.1% were bad and lower than its two-year revenue losses.
Diving into the nuances of Watsco’s earnings can give us a better understanding of its performance. Watsco’s operating margin has declined over the last two yearswhile its share count has grown 1.5%. This means the company not only became less efficient with its operating expenses but also diluted its shareholders. 
In Q2, Watsco reported EPS of $4, down from $4.52 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street expects Watsco’s full-year EPS to grow 13.6% from $11.53 to $13.10.
Key Takeaways from Watsco’s Q2 Results
We struggled to find many positives in these results. Its EPS missed and its revenue fell short of Wall Street’s estimates. Overall, this quarter could have been better. The stock traded down 3.8% to $353.40 immediately following the results.
Watsco didn’t show its best hand this quarter, but does that create an opportunity to buy the stock right now? The latest quarter does matter, but not nearly as much as longer-term fundamentals and valuation, when deciding if the stock is a buy. We cover that in our actionable full research report which you can read here (it’s free).
