Watsco at Morgan Stanley’s 14th Annual Laguna Conference: scale and tech

On September 16, 2026, Watsco (WSO) addressed the company's growth and technology advancements at Morgan Stanley’s 14th Annual Laguna Conference. The distributor, operating in a $75 billion industry with an 18% to 20% market share, highlighted several factors contributing to its success, including scale, technology spending, and strong relationships with manufacturers.

During the second quarter, residential equipment demand improved, growing at a mid-single-digit rate with balanced price and volume. The company noted that inventory was reduced by 30% late last year, leading to inventory turns moving closer to historical levels of 4.5 times while maintaining product availability for customers.

Watsco's technology budget of $60 million to $65 million annually supports its operations of 700 stores, 100,000 contractors, and 30,000 SKUs. The distributor faces softer light commercial activity, but VRF and other commercial categories still offer growth potential as refrigerant transitions continue.

The company's pre-acquisition sales amount to $7.2 billion, with recent deals adding about $750 million in annual volume. Watsco serves 100,000 contractors through 700 stores and manages about 30,000 SKUs. The sector's overall industry size is $75 billion.

Watsco's market cap stands at $11.73 billion with a P/E ratio of 26.1. The stock is viewed as undervalued by InvestingPro analysis, positioning it among opportunities on the platform’s most undervalued stocks list. The company also acquired Peirce-Phelps, a 99-year-old family business, which remains under original family management and has achieved a 30% return on invested capital.

Management emphasized that equipment accounts for about 70% of the business, with residential equipment being the largest part. Commercial operations, including light commercial, applied, and VRF systems, make up about 15% to 20% of total business. The distributor's strong position is further supported by its low working capital needs of about 90 days of sales.

The industry experienced easing regulatory and supply chain pressures in recent quarters, leading to a calmer and more stable environment for Watsco. Barry Logan, executive vice president, mentioned that the company and its partners spent much of the prior period dealing with compliance, regulation, and product transitions, but that burden has eased, creating a "liberation of spirit."

Inventory management remains an essential focus, with Watsco reducing inventory by 30% between September and December 2025. Inventory turns have improved from about 3.0 times to a level closer to the historical 4.5 times. The company is now "finessing" inventory rather than cutting aggressively, prioritizing customer availability and closely monitoring lead times to guide safety stock decisions.