Watsco just posted its Q3 2026 report with record quarterly sales of US$2.22b and basic earnings per share of US$4.03. The stock slipped about 1.4% to roughly US$301, extending a soft three month stretch, even as the business reported higher revenue and net income than a year ago.
The focus is on margins. A 26.4% gross margin and 10.1% operating margin arrived in a market that had been paying a premium P/E for this distributor. Today's price dip appears to reflect a shift in sentiment around what investors are willing to pay for that profit profile.
Love Watsco's record Q3 revenue and solid margins but uneasy about paying up for a premium P/E when sentiment turns cautious? Compare this setup against our screener of high quality distributors and industrials in the 29 high quality undervalued stocks .
Q3 2026 Earnings Summary
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Revenue (Q3 2026 vs. Q3 2025):US$2,220.4m vs. US$2,067.0m (up about 7%)
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Net Income (Excl. Extra Items, Q3 2026 vs. Q3 2025):US$155.4m vs. US$150.9m (up about 3%)
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Basic EPS (Earnings Per Share, Q3 2026 vs. Q3 2025):US$4.03 vs. US$3.98 (up about 1%)
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Margins (Q3 2026):Gross margin was 26.4%, and operating margin was 10.1% for the quarter (year-on-year comparison not quantified)
Earnings tell part of the story, but investors who care about what they are paying often focus on the cash that actually moves through Watsco's business over time. If you line up Watsco's cash flows against its current share price, the stock could be a hefty 46% undervalued .
Evaluating Watsco's Digital And M&A Milestones
The bullish script argues that Watsco's tech and deal playbook can scale the business and increase profitability over time.
"A key factor is that Watsco converts its investments in e-commerce, mobile tools and platforms such as OnCall Air and SupplySync into durable contractor loyalty and higher inventory efficiency as industry conditions normalize."
Q3 provides some support for that claim. E-commerce now accounts for about 37% of trailing 12-month sales with growth of roughly 12%. OnCall Air processed about 351,000 proposals tied to around US$2 billion in merchandise value. SupplySync has moved from concept to live pilot and is already transacting. Together with Jackson Supply growing 16% in its first reported quarter, Watsco is checking off early execution milestones that align with the bullish narrative.
Not everyone reads the same price the same way. → See the higher figure this Narrative lands on, and how it gets there .
Watsco Margin Rebuild Still Faces Execution Questions
Bearish investors worry that Watsco's digital push is not yet strong enough to rebuild profitability toward management's target. The concern centers on whether software usage translates into hard margin dollars.
"Although Watsco is investing roughly US$60 million to US$65 million each year in technology and reports rising e-commerce and OnCallAir usage, the recent revenue and EPS miss together with greater than anticipated gross margin contraction suggest these digital tools may not yet be offsetting pricing and cost pressures."
Q3's 26.4% gross margin and 10.1% operating margin, while linked to record sales, still sit below the 30% objective. Jackson Supply's lower margin profile and mix toward equipment confirm that the margin rebuild is incomplete, so this quarter does not yet disprove the bearish concern around monetization timing.
Hunt For Quieter Mispricings
Watsco just showed how a solid operational story can trade through a cautious mood shift. The real opportunity is finding stocks that could be undervalued before the market corrects them.
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Company 1 - 19% below our estimate - targets faster overseas teahouse expansion while seeking to keep franchise and company store costs aligned.
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Company 2 - 27% below our estimate - supplies diagnostic equipment and components needed as grid upgrades and defense programs progress.
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Company 3 - 34% below our estimate - expands high horsepower engine capacity to address data center power demand while limiting newer zero-emission project losses.
That is three of the list. See all 29 potentially undervalued companies →
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Companies discussed in this article include WSO .
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