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Watts Water (WTS) Down 2.2% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Watts Water (WTS - Free Report) . Shares have lost about 2.2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Watts Water due for a breakout? 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 Beats Q4 Earnings & Revenue Estimates

Watts Water reported healthy fourth-quarter 2020 results, wherein the top and the bottom lines beat the respective Zacks Consensus Estimate.

Net Income

On a reported basis, quarterly net income was $29.2 million or 86 cents per share compared with $31.8 million or 93 cents per share in the year-ago quarter. The deterioration was primarily due to higher provision for income tax.

In 2020, net income was $114.3 million or $3.36 per share compared with $131.5 million or $3.85 per share in 2019.

Quarterly adjusted net income was $38.9 million or $1.15 per share compared with $34.2 million or $1.00 per share in the prior-year quarter. The bottom line beat the Zacks Consensus Estimate by 14 cents.

Revenues

On a reported basis, quarterly net sales inched up 0.8% year over year to $403.4 million, reflecting better-than-expected sales in the Americas and Europe. The top line surpassed the consensus estimate of $387 million. Organic sales decreased 2% year over year.

In 2020, reported sales declined 5.7% year over year to $1,508.6 million.

Quarterly Segment Results

Americas: Net sales slipped 1.3% year over year to $264.4 million. Organic sales declined 2%, as growth in plumbing products and electronics was more than offset by reductions in heating and hot water, water quality, drains and HVAC products. Adjusted operating income improved 0.9% to $45.9 million.

Europe: Net sales increased 5.5% year over year to $119.9 million, including a positive impact of 8% from foreign exchange movements. Organic sales were down 2%, as increased fluid solution product sales were more than offset by a reduction in drain sales. Adjusted operating income was $16.8 million, up 25.4% year over year, benefiting from increased productivity.

Asia-Pacific, Middle East and Africa: Net sales improved 1.6% to $19.1 million. Organic sales decreased 8%. Increased sales in China were more than offset by soft markets in the Middle East and Australia. Adjusted operating income came in at $3.4 million compared with $3 million in the prior-year quarter. The improvement was driven by cost controls and productivity as well as higher intercompany volume.

Other Details

Cost of goods sold was $234.2 million compared with $230.2 million in the year-ago quarter. Gross profit declined to $169.2 million from $170.1 million. Operating income was $54.4 million, up 15%, driven by higher sales and aggressive cost actions. GAAP operating margin was up 170 basis points (bps) to 13.5%. Adjusted operating margin was 13.6%, up 110 bps.

The company incurred $1.2 million in restructuring and other related costs. It repurchased about 37,000 shares for $4.2 million during the quarter.

Cash Flow & Liquidity

In 2020, Watts Water generated $228.8 million of net cash from operating activities compared with $194 million in 2019. Free cash flow was $187.2 million compared with $164.9 million, supported by better working capital management.

As of Dec 31, 2020, the company had $218.9 million in cash and cash equivalents with $198.2 million of long-term debt (net of current portion). This compares with the respective tallies of $219.7 million and $204.2 million a year ago.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 5.38% due to these changes.

VGM Scores

At this time, Watts Water has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, 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 A. 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 this revision looks promising. Notably, Watts Water has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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