Buried within the recent Watsco (WSO) Q1 2024 earnings call transcript, a seemingly innocuous statement from Barry Logan, Executive VP of Planning and Strategy, might hold the key to a surprising prediction: is the HVAC giant quietly anticipating a resurgence in the housing market?

While much of the call focused on regulatory transitions, gross margin pressures, and inventory management, Logan dropped a curious comment when discussing the health of the residential HVAC market. He highlighted the fact that higher-priced heat pumps and higher-efficiency units were significantly outperforming all other products. This, he argued, is an "early-stage indicator of what's going on in the market."

On the surface, this seems like standard industry analysis. Consumers are choosing more expensive, efficient systems, likely driven by environmental concerns and a desire for long-term cost savings. However, there's a deeper implication here that might be flying under the radar.

The purchase of high-end HVAC systems often correlates with new home construction or major renovations. After all, if you're simply replacing a failing unit in an existing home, you're less likely to splurge on the top-of-the-line model. You're aiming for functionality and affordability.

Logan's observation, then, suggests a potential uptick in new housing activity, a trend that hasn't been widely reflected in broader economic indicators. While mortgage rates have eased slightly, they remain elevated, keeping the housing market relatively subdued.

Could Watsco, with its vast network and deep understanding of the HVAC market, be seeing something that others aren't?

Consider this: Watsco's Q1 sales, traditionally a slow period for the HVAC industry, were record-breaking. This was attributed to price realization, a richer sales mix (driven by those high-end systems), and new locations. But what if the sales mix is signaling not just consumer preference but a shift in the type of customer? What if more of these sales are going to contractors building new homes?

Further bolstering this hypothesis is Logan's comment on the health of contractor credit. He pointed out that bad debt expense was actually down year-over-year, a sign of financial stability among Watsco's contractor base. Again, healthy contractors with strong credit are more likely to be involved in new construction projects.

Let's look at some numbers. Watsco reported mid-single-digit same-store sales growth in April, a strong start to the key summer selling season. If this trend continues, it would signal a significant acceleration from the 8% decline in unitary HVAC unit volumes experienced in 2023.

Of course, attributing this entirely to a mini housing boom would be premature. Other factors, such as pent-up demand from the softer 2023 season, could be at play. However, the convergence of strong sales, a favorable sales mix, and healthy contractor credit paints a compelling picture.

It's as if Watsco is sending a subtle whisper, a hint that the housing market might be gearing up for an unexpected rebound. While it's too early to make definitive pronouncements, this intriguing possibility warrants further investigation. After all, when the largest HVAC distributor in North America speaks, it's wise to listen closely.

Heat Pump vs. Other HVAC Sales Growth

The following chart, derived from Barry Logan's comments, illustrates the significantly stronger growth of heat pump sales compared to other HVAC systems. This could indicate a shift towards new construction and major renovations, where heat pumps are often preferred.

Watsco Q1 2024 Earnings Call Key Highlights

"Fun Fact: Did you know that Watsco's commitment to its decentralized, entrepreneurial culture is so strong that they even let their acquired businesses keep their original names? It's like a family of HVAC all-stars, each with their unique strengths, all working together under the Watsco banner."