Watts Water (WTS) Surges 33% YTD: Will the Upward Trend Last?
Watts Water Technologies WTS is witnessing strong momentum this year so far. The stock has surged 33.3% year to date compared with the sub-industry’s and S&P Composite’s growth of 20.2% and 19.7%, respectively.
With healthy fundamentals and strong growth opportunities, this Zacks Rank #2 (Buy) stock appears to be a solid investment option at the moment.
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.
Image Source: Zacks Investment Research
Catalysts Driving Growth
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%.
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. WTS 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, the company 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.
Strategic Acquisitions
Acquisitions are also likely to play a pivotal growth in business expansion. 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.
A Few Headwinds
Owing to tougher year over year comps, WTS expects fourth quarter organic sales to be lower than the prior year.
Performance in Europe in the fourth quarter is likely to be affected due to 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 Americas region.
A Look at Estimates
Watts Water’s earnings per share (EPS) are expected to rise 12.2% and 3.9% on a year-over-year basis to $8.00 and $8.31 in 2023 and 2024, respectively.
The Zacks Consensus Estimate for 2023 and 2024 earnings has gained 2.8% and 3.7%, 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.
Other Stocks to Consider
Some other top-ranked stocks worth consideration in the broader technology space are Adobe ADBE, Synopsys SNPS and Woodward WWD, each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
The Zacks Consensus Estimate for Adobe’s fiscal 2023 EPS has inched up by 0.1% in the past 60 days to $15.93. ADBE’s long-term earnings growth rate is 13.5%.
Adobe’s earnings beat the Zacks Consensus Estimate in each of the last four quarters, the average surprise being 3.3%. Shares of ADBE have surged 85.4% in the past year.
The Zacks Consensus Estimate for Synopsys’ fiscal 2024 EPS has remained flat in the past 30 days at $12.52. SNPS’ long-term earnings growth rate is 16.7%. Shares of SNPS have gained 62.6% in the past year.
The Zacks Consensus Estimate for Woodward’s fiscal 2024 EPS has improved 3.1% in the past 60 days to $4.66.
WWD’s earnings outpaced the Zacks Consensus Estimate in three of the last four quarters and missed once, the average surprise being 14.7%. Shares of WWD have jumped 33.9% in the past year.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Adobe Inc. (ADBE) : Free Stock Analysis Report
Synopsys, Inc. (SNPS) : Free Stock Analysis Report
Watts Water Technologies, Inc. (WTS) : Free Stock Analysis Report
Woodward, Inc. (WWD) : Free Stock Analysis Report
