Watsco (WSO) distributes air conditioning, heating, and refrigeration equipment in a highly cyclical market. Given lingering economic challenges, analysts are calling Watsco overpriced at a 26 P/E and they’re lowering both earnings estimates and stock price targets.

Watsco distributes products for brand-name companies such as Trane and Carrier via 535 locations, serving more than 500,000 customers. Some 75 percent of Watsco’s sales are for replacement equipment.

For the third-quarter of 2011, Watsco reported total sales of $914 million, up 12 percent from $812.7 million in 2010. Net income for the quarter was $1.02 per share, up 5 percent

For the full-year, the consensus earnings estimate was lowered to $2.67 per share. The 2012 Wall Street earnings estimate, also lowered, is $3.11.

Limited growth

Watsco does have a growth game plan, though. It has expanded through acquisitions, snapping up 55 HVAC/R distributors since 1989. Watsco CEO Albert Nahmad estimates that the company controls less than 10 percent of the $30 billion HVAC/R equipment market, resulting in “significant growth potential.”

On the downside, S&P analysts note that Nahmad commands nearly complete voting control of his company through extensive stock holdings.

Watsco does pay a hefty dividend of 3.6 percent, hiking it for 11 consecutive years. This year the dividend rose 9 percent, fueled by a sound balance sheet and healthy cash flow.

However, UBS analysts have a sell rating on Watsco, citing limited growth potential in consumer and residential end markets. They expect the stock price to sink to $49.

The company next reports on Feb. 14.