U.S. markets closed
  • S&P Futures

    3,365.00
    -18.00 (-0.53%)
     
  • Dow Futures

    27,221.00
    -144.00 (-0.53%)
     
  • Nasdaq Futures

    11,536.00
    -52.00 (-0.45%)
     
  • Russell 2000 Futures

    1,574.60
    -14.40 (-0.91%)
     
  • Crude Oil

    38.65
    -0.92 (-2.32%)
     
  • Gold

    1,907.50
    -4.40 (-0.23%)
     
  • Silver

    24.43
    -0.14 (-0.57%)
     
  • EUR/USD

    1.1784
    -0.0006 (-0.05%)
     
  • 10-Yr Bond

    0.7780
    -0.0230 (-2.87%)
     
  • Vix

    33.35
    +0.89 (+2.74%)
     
  • GBP/USD

    1.3032
    -0.0009 (-0.07%)
     
  • USD/JPY

    104.3020
    -0.1920 (-0.18%)
     
  • BTC-USD

    13,764.21
    +9.45 (+0.07%)
     
  • CMC Crypto 200

    272.23
    +10.94 (+4.19%)
     
  • FTSE 100

    5,728.99
    -63.02 (-1.09%)
     
  • Nikkei 225

    23,410.76
    -75.04 (-0.32%)
     

Watts Water Technologies, Inc.'s (NYSE:WTS) Share Price Not Quite Adding Up

Simply Wall St
·3 mins read

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider Watts Water Technologies, Inc. (NYSE:WTS) as a stock to avoid entirely with its 28.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings that are retreating more than the market's of late, Watts Water Technologies has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for Watts Water Technologies

pe
pe

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Watts Water Technologies.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Watts Water Technologies' is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 11% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 33% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 10% per year over the next three years. With the market predicted to deliver 13% growth per year, the company is positioned for a weaker earnings result.

With this information, we find it concerning that Watts Water Technologies is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Watts Water Technologies' P/E?

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Watts Water Technologies' analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 1 warning sign for Watts Water Technologies you should be aware of.

If you're unsure about the strength of Watts Water Technologies' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.