Why Is Watts Water (WTS) Up 3.7% Since Last Earnings Report?
It has been about a month since the last earnings report for Watts Water (WTS). Shares have added about 3.7% in that time frame, underperforming 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 its most recent earnings report in order to get a better handle on the important drivers.
Watts Water Q3 Earnings Beat Estimates
Watts Water reported third-quarter 2023 adjusted earnings per share (EPS) of $2.04, which increased 14% on a year-over-year basis and beat the Zacks Consensus Estimate by 11.5%.
The company’s quarterly net sales rose 3% year over year to $504 million. The top line surpassed the Zacks Consensus Estimate by 0.2%. Organic sales were flat year over year.
The company’s performance benefited from higher revenue growth in Asia-Pacific, the Middle East and Africa (APMEA) and Europe amid rising inflation.
Segment Results
Americas: Net sales remained flat year over year to $351 million. Organic sales increased 1% amid tougher year-over-year comparisons. Adjusted operating income was up 260 basis points (bps) year over year to 24.5%, driven by increased price realization, favorable product mix and productivity, partly offset by inflation and higher investments.
Europe: Net sales were up 6% year over year to $120 million, including a favorable foreign exchange impact of 7%. Organic sales were down 1%, owing to a decline in sales of drain products. Adjusted operating income was down 190 bps year over year to 10.4%, owing to inflationary impact and reduced volume.
APMEA: Net sales increased 33% to $33 million. Organic sales moved up 1% from the Middle East and Australia. The unfavorable foreign exchange impact was 4%. Adjusted operating margin increased 70 bps to 17.2% due to increased trade and affiliate sales volume, along with increased price and productivity.
Other Details
Gross profit increased 8% year over year to $234.4 million. Selling, general and administrative expenses decreased 8% year over year to $146.9 million. Operating income was $87.1 million, up 8% year over year.
GAAP operating margin increased 80 bps to 17.3%. The adjusted operating margin was 18%, up 120 bps year over year.
Cash Flow & Liquidity
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 period.
For the nine months that ended Sep 24, 2023, the free cash flow was $181.9 million compared with $67 million in the year-ago period. The increase was due to higher net income and reduced working capital investment.
The company repurchased 22,000 shares for $4 million in the third quarter.
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.
Guidance
For fourth-quarter 2023, the company expects organic sales to decrease 6% to 1%. The adjusted operating margin is estimated to rise between 15% and 15.6%, with the adjusted margin projected to increase in the range of 70 bps-130 bps. The company expects the free cash flow performance to be seasonally strong.
For 2023, Watts Water expects organic sales to be flat compared with the previous guidance of down 2% to increase 2%. The adjusted operating margin is now estimated to be between 17.6% and 17.7% compared with the previous guidance of 16.7% and 17.3%. The adjusted margin is expected to rise between 120 bps and 130 bps.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended upward during the past month.
VGM Scores
At this time, Watts Water has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% 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 broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Watts Water has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
Performance of an Industry Player
Watts Water is part of the Zacks Instruments - Control industry. Over the past month, Badger Meter (BMI), a stock from the same industry, has gained 3.5%. The company reported its results for the quarter ended September 2023 more than a month ago.
Badger Meter reported revenues of $186.19 million in the last reported quarter, representing a year-over-year change of +25.8%. EPS of $0.88 for the same period compares with $0.61 a year ago.
For the current quarter, Badger Meter is expected to post earnings of $0.76 per share, indicating a change of +26.7% from the year-ago quarter. The Zacks Consensus Estimate has changed +0.9% over the last 30 days.
Badger Meter has a Zacks Rank #1 (Strong Buy) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of D.
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