Watts Water (WTS) Up 5.7% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Watts Water (WTS). Shares have added about 5.7% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Watts Water due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Watts Water Tops Q2 Earnings Estimates, Raises 2021 Outlook

Watts Water reported solid second-quarter 2021 results, wherein both the bottom line and the top line surpassed their respective Zacks Consensus Estimate. Robust operating momentum and higher sales across all regions favored the results.

Net Income

On a reported basis, net income in the June quarter was $37.5 million or $1.11 per share compared with $20.2 million or 59 cents per share in the year-ago quarter. The improvement primarily resulted from solid top-line growth.

Adjusted net income was $50.1 million or $1.48 per share compared with $25.2 million or 74 cents per share in the prior-year quarter. Also, the bottom line beat the Zacks Consensus Estimate by 19 cents, delivering a surprise of 14.7%.

Revenues

On a reported basis, quarterly net sales surged 37.9% year over year to $467 million. The growth reflects the positive impact of the freezing weather in the South-Central United States. Also, the top line surpassed the consensus estimate of $424 million. Organic sales increased 32.1% year over year.

Segment Results

Americas: Net sales grew 29.4% year over year to $307.1 million. Organic sales increased 27.9% as a result of the global economic recovery. Adjusted operating income improved 53.5% to $54.5 million. The improvement was mainly driven by volume, pricing, productivity and restructuring savings. However, it was partially offset by incremental investments and normalized costs.

Europe: Net sales surged 55.3% year over year to $136.8 million, including a positive impact of 14% from foreign exchange fluctuations. Organic sales were up 41.3%. Adjusted operating income was $23.3 million, up 161.8% year over year, driven by volume, pricing, productivity and cost actions.

Asia-Pacific, Middle East and Africa: Net sales improved 75% to $23.1 million. This includes acquired sales of 14% and a positive foreign exchange impact of 10%. Organic sales increased 51% on solid growth in China and New Zealand as well as due to the global economic recovery. Adjusted operating income came in at $4.1 million compared with $1.7 million in the prior-year quarter. The improvement was driven by increased affiliate volume as well as cost actions and productivity initiatives.

Other Details

Cost of goods sold was $266.9 million compared with $203.8 million in the year-ago quarter. Gross profit improved to $200.1 million from $134.9 million. Operating income was $52.7 million, up 70%. GAAP operating margin was up 210 basis points (bps) to 11.3%. Adjusted operating margin was 14.9%, up 380 bps.

The company incurred $17 million in restructuring costs. It repurchased nearly 31,000 shares for $4 million during the quarter.

Cash Flow & Liquidity

In the first six months of 2021, Watts Water generated $73.2 million of net cash from operations compared with $47.3 million in the year-ago period. Free cash flow for the same period totaled $65.1 million, up from $25 million, driven by higher net income and lower net capital expenditures.

As of Jun 27, 2021, the company had $240.1 million in cash and cash equivalents with $191.5 million of long-term debt.

2021 Outlook Updated

Thanks to the robust performance in the second quarter, which included restructuring and other charges related to French facility exit, Watts Water has raised full-year 2021 outlook. It expects total organic revenues to increase 10% to 14% versus the prior outlook of 2% to 7%. Adjusted operating margin is anticipated to expand 100-150 bps year over year compared with the previous guidance of 30-70 bps. The company expects better third-quarter performance on the back of year-over-year incremental sales and margin improvement.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 16.27% due to these changes.

VGM Scores

Currently, Watts Water has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Watts Water has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.

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