Is Watsco, Inc. overvalued or undervalued?

As of 3 May 2024, Watsco, Inc. has moved from an expensive to a very expensive valuation grade. The company is currently overvalued, with a P/E ratio of 34, significantly higher than its peers, such as Masco Corp. at 15.28 and Allegion Plc at 18.85. Additionally, Watsco's EV to EBITDA stands at 25.34, while its peer average is notably lower, indicating a premium valuation compared to the industry.
The company's financial metrics further reinforce this overvaluation narrative, with a Price to Book Value of 7.49 and a ROE of 21.95%. Despite a relatively attractive dividend yield of 2.17%, the high valuation ratios suggest that investors are paying a steep price for the stock. In comparison to the S&P 500, Watsco has underperformed over the past year, returning -9.06% versus the index's 10.26%, which may indicate a correction is necessary to align its valuation with market expectations.