Shares of Watts Water Technologies, Inc. (WTS Quick QuoteWTS - Free Report) have surged 73.8% over the past year, driven by a balanced cash allocation strategy and healthy revenues on the back of a holistic growth model. Earnings estimates for the current fiscal have increased 38.6% over the past year and the same for the next fiscal has moved up 31.7%, implying robust inherent growth potential. With healthy fundamentals, this Zacks Rank #2 (Buy) stock appears to be a solid investment option at the moment. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Image Source: Zacks Investment Research

Growth Drivers

Headquartered in North Andover, MA, Watts Water designs, manufactures, and sells various water safety and flow control products for maintaining water quality, water conservation, water safety, and water flow control markets. The products aim to reduce labor dependency and offer seamless connectivity to monitor water pipe systems more accurately and continuously than manual water products.

The company aims to launch smart and connected products, which are likely to provide it with further differentiation in the marketplace. Watts Water is benefiting from aggressive cost reduction actions along with a strong balance sheet. It is focused on enhancing organic growth, driving margin expansion and reinvesting in productivity initiatives. The company has started to realize the expected benefits of portfolio rationalization, footprint optimization, and global sourcing while simultaneously reinvesting for future growth through product development, geographic expansion, and key account management.

Watts Water’s operating margin expansion is likely to be driven by higher volume and productivity optimization efforts. The company believes that the Asia-Pacific segment’s margin will expand primarily on higher volume. Furthermore, the operating margin in the Americas segment will expand driven by volume leverage and productivity initiatives. Watts Water expects its pricing actions to partly mitigate commodity inflation. In addition, the company is more vertically integrated than most of the industry participants with its own foundry to produce castings and forgings. This, in turn, reduces reliance on third-party supply chain vendors to produce these products.

Thanks to the robust performance in the second quarter, Watts Water has raised full-year 2021 outlook. It expects total organic revenues to increase 10% to 14% versus the prior outlook of 2% to 7% with pent-up demand for repair and replace markets. Adjusted operating margin is anticipated to expand 100-150 basis points (bps) year over year compared with the previous guidance of 30-70 bps. The company expects relatively healthy third-quarter performance on the back of year-over-year incremental sales and margin improvement.

The stock has a long-term earnings growth expectation of 8%. It delivered an earnings surprise of 17.3%, on average, in the trailing four quarters. With a VGM Score of B, Watts Water currently appears to be a solid investment pick at the moment.

Other Key Picks

Some other top-ranked stocks in the industry are Allied Motion Technologies, Inc. and Transcat, Inc. (TRNS Quick QuoteTRNS - Free Report) , sporting a Zacks Rank #1, and Sensata Technologies Holding N.V. (ST Quick QuoteST - Free Report) , carrying a Zacks Rank #2.

Allied Motion Technologies has a long-term earnings growth expectation of 10%. It delivered an earnings surprise of 52.4%, on average, in the trailing four quarters.

Transcat has a long-term earnings growth expectation of 8%. It delivered an earnings surprise of 49.9%, on average, in the trailing four quarters.

Sensata has a long-term earnings growth expectation of 11%. It delivered an earnings surprise of 13.2%, on average, in the trailing four quarters.