Watts Water (WTS) Appears Primed for Growth With 45% YTD Gain
Watts Water Technologies WTS is witnessing strong momentum, with the stock having gained 44.9% year to date compared with the sub-industry’s and S&P Composite’s growth of 28.8% and 25.1%, respectively.
WTS designs, manufactures and sells various water safety and flow control products for the water quality, water conservation, water safety and water flow control markets.
With healthy fundamentals and strong growth opportunities, this Zacks Rank #1 (Strong Buy) stock appears to be a solid investment option at the moment.
Watts Water’s earnings per share (EPS) are expected to rise 13.3% and 3% on a year-over-year basis to $8.08 and $8.33 in 2023 and 2024, respectively. It has a long term earnings growth rate of 7.8%.
The Zacks Consensus Estimate for 2023 and 2024 EPS has gained 3.9% and 4.5%, respectively, in the past 60 days, reflecting analysts’ optimism.
Revenues are projected to improve 3% and 10% to $2.04 billion and $2.24 billion for 2023 and 2024, respectively.
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Growth Factors
WTS is likely to benefit from continued investment in smart and connected products, which are expected to provide further differentiation in the marketplace. Watts Water is focused on enhancing organic growth via new product introductions, driving margin expansion and reinvesting in productivity initiatives.
Strength in sales of nonresidential core valve products is driving revenues from the Americas region. In the last reported quarter, organic sales from the region increased 1% despite tougher year-over-year comparisons.
Strong momentum in the Asia-Pacific region and healthy growth in Europe are additional tailwinds. In the last reported quarter, sales from Asia-Pacific, the Middle East and Africa reported a 33% improvement to $33 million. In Europe, net sales were up 6% year over year to $120 million including a favorable foreign exchange impact of 7%.
Management raised its adjusted operating margin outlook for 2023, driven by strong third-quarter results. For 2023, adjusted operating margin is now estimated to be between 17.6% and 17.7% compared with the previous guidance of 16.7-17.3%.
Strategic Acquisitions
Acquisitions are also likely to play a pivotal growth in business expansion. Recently, the company announced the acquisition of Josam Company. Subject to customary closing conditions, the transaction is expected to close in January 2024.
WTS has not divulged any financial details of the deal at present but added that it will provide more information regarding the same at its fourth-quarter 2023 earnings call in February 2024.
Headquartered in Michigan City, IN, Josam specializes in designing and manufacturing drainage and plumbing products. It has a varied customer base serving commercial, industrial and multi-family end markets. The company’s annualized sales are nearly $35 million, per WTS.
In October 2023, the company acquired Bradley Corporation for $303 million. Bradley Corporation’s high-quality and code-driven products are anticipated to complement WTS' existing portfolio and enable the provision of innovative water solutions. Both companies aim to leverage their combined sales networks for cross-selling opportunities and accelerated growth. Also, the buyout strategically broadens the company’s reach in commercial and industrial markets, aligning with long-term trends such as water conservation, safety, regulation and energy efficiency.
In April 2023, Watts Water completed the acquisition of Enware Australia to expand its global footprint. With this, Australia and New Zealand now represent more than half of the APMEA region revenues, noted WTS.
Solid Capital Allocation Strategy
The company’s healthy balance sheet and strong cash flow generating ability are expected to help it sustain a solid capital allocation strategy.
For the nine months that ended Sep 24, 2023, Watts Water generated $200.9 million of cash from operating activities compared with $86.3 million in the prior year. Free cash flow was $181.9 million compared with $67 million a year ago. The increase was due to higher net income and reduced working capital investment.
Watts Water repurchased 22,000 shares for $4 million in the third quarter. For the first nine months of 2023, the company repurchased 69,000 shares worth $11.7 million.
As of Sep 24, 2023, Watts Water had $362.7 million in cash and cash equivalents with $98.2 million of long-term debt compared with the respective figures of $291.9 million and $98 million as of Jun 25, 2023.
A Few Headwinds
WTS expects fourth-quarter organic sales to be lower than the prior year due to tougher year-over-year comps,
Performance in Europe in the fourth quarter is likely to be affected by the weakness in macroeconomic conditions. Also, rising interest rates and tight lending scenario on new construction are concerns.
Continuing softness in certain specialty channel products like gas connectors, radiant heating applications and commercial marine instrumentation is likely to weigh on the revenue performance of the Americas region.
Other Stocks to Consider
Some other top-ranked stocks worth consideration in the broader technology space are Blackbaud BLKB, NETGEAR NTGR and Woodward WWD. Each stock carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Blackbaud’s 2023 EPS has inched up 1.8% in the past 60 days to $3.86. BLKB’s long-term earnings growth rate is 23.4%.
Blackbaud’s earnings beat the Zacks Consensus Estimate in each of the last four quarters, the average surprise being 10.6%. Shares of BLKB have gained 50.4% in the past year.
The Zacks Consensus Estimate for 2023 is pegged at a loss of 9 cents per share for NETGEAR, which remained unchanged in the past 30 days. NTGR’s earnings outpaced the Zacks Consensus Estimate in three of the last four quarters while missing once. The average surprise was 127.5%. Shares of NTGR were down 14.8% in the past year.
The Zacks Consensus Estimate for Woodward’s fiscal 2024 EPS has improved by 7.2% in the past 60 days to $4.92. WWD’s earnings surpassed the Zacks Consensus Estimate in each of the last four quarters, the average surprise being 14.7%. Shares of WWD have jumped 44.4% in the past year.
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