WatscoWSO

The company reported earnings of $4 per share, falling short of the $4.41 analysts expected. Revenue of $2.1 billion also came in slightly lower than forecasts. The results show that homeowners are still hesitant to spend on expensive new air conditioning and heating systems while interest rates remain high.

To help offset this slow period, the company closed its purchase of Jackson Supply Company, which adds 25 locations across the Sunbelt. This fits the long-term strategy of buying smaller rivals to gain more control over key regions. Even with the profit drop, the company remains debt-free and is using its cash to grow its digital sales platform.

See the full quarter, and how our tracked metrics did

Source: 8-K filing

Baird kept its outperform rating, which is its way of saying it expects the stock to do better than the broader market. While the firm lowered its price target from $460 to $420, it still sees significant room for the stock to rise from its current levels.

This call shows that some major analysts still believe in the company's long-term ability to grow through acquisitions and its exclusive partnership with manufacturers like Carrier, even if the current housing market is a bit soft.

Key highlights

• Profit margins normalizing: The company's gross profit margin, which is the percentage of sales kept after the cost of goods, fell to 27.5% from 29.3% a year ago. Management explained that last year was unusually high due to large price hikes to cover inflation, and margins are now returning to more typical levels.
• Technology adoption growing: E-commerce sales grew 13% during the first six months of 2026 and now make up 37% of total sales. This shift toward digital orders is important because it lowers the cost of serving customers and builds stronger loyalty with contractors.
• New market expansion: The company acquired Jackson Supply during the quarter, adding $230 million in annual sales and 25 new locations across the Sunbelt. This purchase is part of a larger strategy that has added 13 companies and $1.8 billion in yearly revenue to the business recently.
• Cash flow improving: Operating cash flow, the money coming in from daily business, improved by $164 million compared to the first half of last year. While the company used $21 million in cash so far this year to build up seasonal inventory, it is moving closer to its goal of generating more cash than it reports in profit.
• Inventory outlook stabilizing: Management expects more conventional supply chain trends for the rest of 2026, which should lead to better inventory turnover. This stability comes as the company finishes a complex transition to new, regulated air conditioning equipment that previously required carry over 10,000 new parts in stock.

Our take: This was a soft quarter where the company struggled to match the exceptionally high profit levels it achieved last year. The main factor was a decline in profit margins as the temporary benefit from large price hikes faded. While the long-term case for its technology and acquisition strategy remains solid, this result shows the business is still finding its footing in a more normal pricing environment.