In short: The spotlight, and the only name in the issue with a number attached. North America's largest HVAC/R distributor, sitting between the OEMs and "over 120,000 independent contractors and technicians" across three segments (HVAC equipment, other HVAC products, commercial refrigeration). The demand quality: "70%-80% of sales are emergency replacements & repairs… when something breaks down, the most important thing for contractors is how easily and quickly they can get the parts, not what they cost." E-commerce is now one third of revenue. Runway: "they sell about 1 in 5 residential systems. There are 2,000+ regional distributors in North America. Watsco isn't even active in all 50 states yet." Fundamentals: asset-light, little debt, 15%+ ROIC, "up nearly 12,000% since 1990." The setup: down over 45% from its peak and the month's third-worst performer at −18.7%, on falling revenue and net income diagnosed as three temporary effects unwinding at once — COVID pull-forward, the A2L refrigerant transition and OEM price normalisation. The valuation, built from management's own targets: $10bn revenue and 30% gross margins, an assumed 8% net margin → $800m of net income, at an assumed 25x → $20bn, "an upside potential of 56%."
Watsco is the middleman for air conditioning and refrigeration in North America: it buys equipment and parts from the manufacturers and stocks them close to the 120,000-odd contractors who install and repair them. Between 70% and 80% of what it sells is an emergency — a unit has failed and someone needs the part today. In that situation the contractor cares about availability, not price, which is why a distributor with local inventory has real pricing power.
It is also a consolidator. It sells about one in five residential systems in America, more than 2,000 regional distributors remain independent, and it does not yet operate in every state. Its ordering software, which now carries a third of revenue, makes contractors more profitable and therefore stickier. The business needs very little capital, has little debt and earns over 15% on the capital it does use; the shares are up roughly 12,000% since 1990.
The shares are nonetheless down more than 45% from their high, because revenue and profit have been falling. The letter's diagnosis is that three temporary distortions are unwinding at once: pandemic demand that was pulled forward from later years (plus dealers working off the inventory they over-ordered), a refrigerant regulation change that scrambled supply and briefly inflated demand, and manufacturers' post-pandemic price rises normalising after having flattered both sales and margins. None of those is a statement about the franchise.
The valuation is the only one in the issue, and it is worth seeing how it is built: management targets $10bn of revenue; assume an 8% net margin, so $800m of profit; assume the market pays 25 times that, so $20bn — 56% above today. Two of those three inputs are assumptions, and there is no date by which any of it must happen.
In short: His example of the quiet, programmatic bolt-on acquirer that the M&A literature misses: "lots of companies have been able to grow sustainably with good returns doing more programmatic smaller acquisitions… you can think of there like Watsco and Roper of the world… those companies have been enormously successful. But they're out of the limelight."
Watsco distributes air-conditioning and heating equipment — it is the middleman between the manufacturers and the contractors who install the units. It has grown for decades by buying up local and regional distributors, a few at a time.
Mayer uses it to make the case that the popular wisdom about mergers is drawn from a biased sample. Everyone remembers the enormous, debt-funded, headline deal that destroyed value; nobody writes about "the little humdrum acquisitions that happen behind the scenes." Companies that make small, repeatable, programmatic purchases with good returns have "been enormously successful. But they're out of the limelight."
The takeaway to reuse: when you see an acquirer, ask whether the deals are small and routine or big and leveraged — that distinction, not acquisition itself, is what the research supports as the red flag.
13:57But there's smaller bolt-ons. Lots of companies have been able to grow sustainably with good returns doing more programmatic smaller acquisitions. And you can think of there like Watsco and Roper of the world, and HEICO, however, 100 plus acquisitions in this time. So those companies have been enormously successful.
In short: Eighth-best YTD performer at +23.4% (5-yr CAGR +10.7%, 10-yr +12.3%). Performance table only; the spotlight write-up comes in August.
In short: DOWNGRADED Buy → Hold — "the largest distributor of HVAC equipment and parts in North America." Again no reason given.
In short: BUY despite failing two of the three methods. 30.5x forward against a 27.1x average — 12.5% over — only 7.3% under on the Earnings Growth Model, and the reverse DCF dissents (11.3% required against 9.2% expected). The 3.2% dividend yield, the highest of any Buy, is doing the work in the 10.6% expected return.
In short: #3. The HVAC distributor selling air-conditioning, heating and refrigeration equipment to contractors and dealers. "Global warming causes an increased demand for HVAC." An attractive serial acquirer with a decentralized model and an excellent track record of creating shareholder value.
Watsco is the middleman for air conditioning and heating: it buys HVAC equipment and parts from manufacturers and distributes them to the contractors who install and service them. Distribution is unglamorous but sticky — a contractor on a job needs the part today, from a branch nearby, with credit and technical support attached.
Slegers likes two things here. The demand side gets a structural push from a warming climate — more cooling, more often, in more places. And the supply side is a roll-up: Watsco keeps acquiring regional distributors and running them decentrally, so growth compounds through deals as well as through the underlying market.
Nothing matches this filter.
Verbatim excerpts from the public transcripts (auto-pulled at each mention's timestamp, lightly cleaned). Timestamps link into the video; "source page" opens that commentator's full analysis at this row. Click a mention's header line to expand it (one open at a time). For personal study — not investment advice.