A month has gone by since the last earnings report for Watts Water (WTS - Free Report) . Shares have added about 11.2% 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 drivers.
Watts Water Q2 Earnings and Revenues Surpass Estimates
Despite coronavirus-induced adversities, Watts Water reported relatively healthy second-quarter 2020 results, with the top and the bottom line surpassing the Zacks Consensus Estimate. However, it witnessed top-line contractions due to lower demand triggered by the adverse impact of the coronavirus pandemic.
On a reported basis, quarterly net income was $20.2 million or 59 cents per share compared with $36.4 million or $1.06 per share in the year-ago quarter. The year-over-year decline was primarily caused due to top-line contraction.
Second-quarter adjusted net income was $25.2 million or 74 cents per share compared with $37.3 million or $1.09 per share in the year-earlier quarter. The bottom line surpassed the Zacks Consensus Estimate by 35 cents.
On a reported basis, quarterly net sales declined 18.7% year over year to $338.7 million, driven by lower demand due to the virus outbreak. Nevertheless, the top line surpassed the Zacks Consensus Estimate of $317 million. Organic sales declined 18.6% year over year.
Quarterly Segment Results
Americas: Net sales fell 17.3% year over year to $237.4 million. Organic sales declined 18% due to weak demand of drains and heating, plumbing and hot water products. Adjusted operating income dropped 30% to $35.5 million as benefits from price and productivity savings on the back of cost saving initiatives were more than offset by higher investments and lower volumes due to COVID-19 impact.
Europe: Net sales declined 22.2% year over year to $88.1 million, affected by foreign exchange movements. Organic sales were down 21% with major declines in all regions and product lines owing to the global pandemic. The segment’s adjusted operating income was $8.9 million compared with $14.1 million in the year-ago quarter. This was mostly led by lower volumes and higher investments, partially offset by productivity and cost-saving initiatives.
Asia-Pacific, Middle East and Africa (APMEA): Net sales dropped 20.5% to $13.2 million. Organic sales declined 18% due to lower demand in most regions owing to COVID-19 pandemic. Adjusted operating income came in at $1.7 million compared with $1.2 million in the prior-year quarter. The year-over-year improvement was mainly driven by productivity initiatives and higher affiliate volume. However, it was partially offset by higher investments and lower third-party volume due to COVID-19 impact.
Cost of goods sold in the second quarter fell 15.9% year over year to $203.8 million, while gross profit was down to $134.9 million from $174.6 million in the prior-year quarter. Operating income was $31 million, down 42.9%. GAAP operating margin was down 380 basis points (bps) to 9.2%, while adjusted operating margin was 11.1%, down 220 bps. The company recorded $6.7 million of restructuring and impairment charges.
Cash Flow & Liquidity
For the first six months of fiscal 2020, Watts Water generated $47.3 million of net cash from operating activities compared with $19.7 million in the year-ago quarter. Free cash flow came in at $25 million in the first half of the year compared with $5.4 million in the prior-year period. The improvement was primarily attributable to lower working capital requirements. As of Jun 28, the company had $148.7 million in cash and equivalents and $262.5 million of long-term debt (net of current portion).
Watts Water has a low net debt leverage ratio of 0.5x. The company repurchased about 79,000 shares for $6.4 million during the quarter. The company restored the share repurchase program effective Jun 29, 2020. Impressively, the company repatriated nearly $56 million in the reported quarter and leveraged a significant chunk of the amount to reduce its debt load.
Although the company has not provided a definitive financial outlook for third quarter 2020, the company expects near-term volatility to continue due to the coronavirus-led pandemonium despite the underlying strength of the resilient business model and the diligent execution of operational plans. Notably, the company has acquired Australian Valve Group Pty Ltd (AVG) in an all-cash transaction on Jul 3.
As stated in the previous quarter, management decided to withdraw guidance for 2020 owing to uncertainty over the impact of coronavirus on long-term revenues and visibility. Nevertheless, Watts Water expects sales and margins to improve in the next quarter compared with second quarter 2020. On an organic basis, revenues are expected to witness a year-over-year decline of 8-12%. Further, the company has undertaken various cost-management initiatives to tide over the storm. These include cost actions through headcount reductions, furloughs and reduced discretionary spending.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 21.26% due to these changes.
At this time, Watts Water has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.
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 #2 (Buy). We expect an above average return from the stock in the next few months.