Watsco's 15min chart shows RSI overbought and KDJ death cross.

Watsco's 15-minute chart has triggered an overbought reading on the RSI indicator, as well as a death cross on the KDJ indicator at 07/15/2025 09:45. This suggests that the stock price has risen too rapidly and is no longer supported by fundamental analysis, indicating a shift in momentum towards the downside and a potential decrease in stock price.

Watsco Inc. (NYSE: WSO) experienced a significant technical sell signal on its 15-minute chart, as indicated by an overbought reading on the RSI indicator and a death cross on the KDJ indicator on July 15, 2025, at 09:45. This suggests that the stock price has risen too rapidly and is no longer supported by fundamental analysis, indicating a shift in momentum towards the downside and a potential decrease in stock price [1].

Morgan Stanley has lowered its price target for Watsco Inc. (NYSE: WSO) to $505.00 from $515.00 while maintaining an Equalweight rating. This adjustment reflects concerns about market growth expectations and the potential impact on Watsco’s performance. Despite the company’s ability to outgrow the broader market, current demand softness and replacement cycle headwinds are cited as factors that could affect Watsco’s performance [1].

Recent financial results for the first quarter of 2025 revealed a notable miss in earnings and revenue. Watsco reported earnings per share of $1.93, falling short of the projected $2.26, and revenue of $1.53 billion, missing the anticipated $1.66 billion. Despite these results, Watsco increased its annual dividend by 11% to $12 per share. The company also completed the acquisition of Southern Ice Equipment Distributors, adding approximately $47 million in annualized sales to its portfolio [1].

Technical indicators suggest that Watsco's stock may be facing a downward trajectory. The 15-minute chart exhibits oversold conditions, indicated by a KDJ Death Cross on July 9, 2025, at 15:45. This suggests that the stock price has increased rapidly, surpassing the level of fundamental support, and momentum is shifting towards a downward trajectory [1].

AndreyPopov/iStock via Getty Images Watsco (NYSE:WSO) is the largest HVAC maintenance and repair service provider and distributor in the US with over 375,000 contractors and technicians. Watsco is benefiting from the industry transition to A2L refrigerants, a key catalyst could potentially drive Watsco pricing and volume growth. I am initiating with a ‘buy’ rating with a fair value of $520 per share. As shown in the chart below, Watsco has demonstrated robust growth over the past, increasing its revenue from $1.65 billion in FY05 to $7.61 billion in FY24. The growth has been driven by both organic expansion as well as tuck-in acquisitions. Watsco 10Ks As depicted in the chart below, the HVAC service market is highly fragmented, with many small regional players. As a result, Watsco has leveraged acquisitions to consolidate the overall market. For instance, in 2025, the company acquired Lashley, a distributor of commercial HVAC supplies with $8 million in annual sales, for $3.7 million. In 2024, Watsco acquired CSI, a HVAC distributor with $13 million in annual sales, for $6.0 million in cash and 1,904 shares of common stocks. I view these small and tuck-in deals as value accretive to Watsco’s shareholders, as these acquired companies are easily integrated into Watsco’s existing service operations. Watsco Investor Presentation Beyond acquisitions, Watsco has steadily grown its HVAC installed base, exceeding 120 million installed units in the US, as shown in the slide below. I think Watsco has been quite successful in expanding its distribution and service centres, increasing its service route density, and enhancing service team productivity over the past few years. Watsco Investor Presentation As the overall HVAC industry is undergoing a transition to A2L refrigerants, a requirement mandated by the American Innovation and Manufacturing [AIM]. As shown in the table below, A2L has lower flammability and lower toxicity compared to A3 refrigerants. The transition, in my view, could bring significant replacement growth opportunities for Watsco in the near future. Rheem Website During its recent earnings call, the management noted that the new A2L system will ultimately account for 55% of our total sales, and the team has been converting nearly $1 billion in inventory to the new A2L system. As a result, its HVAC replacement business experienced strong growth during the recent quarter, significantly benefiting from these regulatory requirements. As the regulatory mandate typically has a 10-15 years cycle, I think the transition to A2L could drive multi-year growth opportunities for Watsco. In terms of capital, Watsco remains a robust balance sheet with zero debt and exited the quarter with $430 million in cash. I think the unlevered balance sheet could support its tuck-in acquisitions. In addition, over the past six years, the company has generated a total of around $2.65 billion in FCF, spent $230 million in acquisitions, and returned $1.83 billion to shareholders via dividends and shares buyback. Watsco released its Q1 FY25 result on April 23, positing 2% revenue decline, with 10% growth in core U.S. residential replacement and 9% decline in international markets. I am impressed by Watsco’s investment in its core IT technology platform, which aims to enhance contractors experience and increase sales productivities. As detailed in the slide below, Watsco delivered 8% year-over-year growth in annualized e-commerce revenue, allowing contractors to place equipment and part orders via online portal with more than 930,000 SKUs. The robust e-commerce platform could improve service turnover and customer satisfaction, in my view. During the call, the management highlighted that its digital platform enables the company to adjust pricing dynamically, and the company will continue to invest in technology to strengthen its competitive advantages. Watsco Investor Presentation For the upcoming Q2, I anticipate the company will sustain its robust growth in the HVAC replacement market, driven by A2L regulatory requirements. I think the management will address market concerns regarding tariff, commodity input costs as well as the pricing environment. I anticipate the company has strong pricing power for its HVAC distribution and maintenance business, as demands are largely non-discretionary. Grand View Research predicts the US HVAC market to grow at a CAGR of 6.9% from 2025 to 2033, driven by the energy efficiency megatrend. I think Watsco could outgrow the market, as it is the leading player with advantages in technology, e-commerce, as well as network effects. I forecast Watsco will grow its revenue by 7% organically in the near future, driven by A2L HVAC replacement, pricing growth, as well as market share gains. Compared to the overall industry growth, I think 7% organic revenue growth is quite conservative. In addition, I forecast the company will allocate 0.5% of revenue towards M&A, contributing to an additional 1.4% growth to the topline, aligning with its historical trend. As such, the total revenue growth is forecast to be 8.4% in my DCF. I anticipate 20bps annual margin expansion, driven by 10bps from pricing adjustments and 10bps from revenue mix towards e-commerce. During the call, the management noted its pricing power over their customers to pass along cost pressure. I calculate the total operating costs will grow by 8.2% annually, leading to 20 bps annual margin expansion. The DCF can be summarized as follows: Watsco DCF I calculate the FCFF as follows: Watsco DCF The WACC is calculated to be 9.6% assuming: risk free 4.2%; beta 0.9; equity risk premium 6%; equity $17bn; debt $0; tax rate 23%. I set the terminal growth to be 5%, assuming 2% pricing growth and 3% volume growth. Discounting all the future FCFF and adding back net cash, the fair value is calculated to be $520 per share, as per my estimate. Key Investment Risks As an HVAC distributor and service provider, Watsco relies on HVAC manufacturers for the product supplies. As noted in its 10K, around 62% of supplies come from Carrier (CARR) and 9% from Rheem. As such, any business interruption with Carrier and Rheem could significantly impact Watsco's growth. While Watsco’s main business is tied to the HVAC replacement cycle, 12% of industry shipments are related to the new residential constructions, as noted in its investor presentation. As such, weak housing starts will pose challenges to Watsco’s overall growth. Due to the high mortgage rate, housing starts have been quite weak in recent years, as depicted in the chart below: Trading Economics Lastly, during its earnings call, the management acknowledged that tariff uncertainties could pose some risks to its businesses in Canada and Latin America, which accounts for around 9% of total sales. While the company has pricing power over their customers, a higher price environment could impact overall demands to some extent. Conclusion I believe the industry’s transition to A2L refrigerants could support multiple years of growth for Watsco. I favor the company’s debt-free balance sheet, massive service network