It has been about a month since the last earnings report for Watts Water (WTS Quick QuoteWTS - Free Report) . Shares have added about 1.9% 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 Q4 Earnings Beat Estimates

Watts Water reported fourth-quarter 2023 adjusted earnings per share (EPS) of $1.97, which increased 23% on a year-over-year basis and beat the Zacks Consensus Estimate by 10.7%.

The company’s quarterly net sales rose 9% year over year to $548 million. The top line surpassed the Zacks Consensus Estimate by 2.8%. Organic sales were down 1% year over year.

The company’s performance benefited from higher revenue growth in Asia-Pacific, the Middle East and Africa (APMEA) and America amid rising inflation.

Segment Results

Americas: Net sales rose 10% year over year to $387 million. Organic sales increased 1% amid tougher year-over-year comparisons. Adjusted operating margin increased 150 basis points (bps) year over year to 20.2%, driven by increased price realization, favorable product mix and productivity, partly offset by inflation and higher investments.

Europe: Net sales were flat year over year to $128 million, including a favorable foreign exchange impact of 5%. Organic sales were down 5% due to lower volumes in both fluid solutions and drain products. Adjusted operating margin was up 220 bps year over year to 15%, owing to favorable price-cost dynamic and product mix.

APMEA: Net sales increased 40% to $33 million. Organic sales moved up 4% from Australia and New Zealand. The unfavorable foreign exchange impact was 1%. Adjusted operating margin decreased 180 bps to 12.6% due to affiliate charges and dilution from the Enware acquisition.

Other Details

Gross profit increased 17% year over year to $255.7 million. Selling, general and administrative expenses increased 17.8% year over year to $173.1 million. Operating income was $86 million, up 21% year over year.

GAAP operating margin increased 100 bps to 14.4%. The adjusted operating margin was 15.8%, up 150 bps year over year.

Cash Flow & Liquidity

For the year ended Dec 31, 2023, Watts Water generated $310.8 million of cash from operating activities compared with $224 million in the prior-year period.

As of Dec 31, 2023, free cash flow was $281.1 million compared with $201.1 million in the year-ago period. The increase was due to higher net income and reduced working capital investment.

The company repurchased 23,000 shares for $4.3 million in the fourth quarter.
As of Dec 31, 2023, the company had $350.1 million in cash and cash equivalents with $298.2 million of long-term debt compared with the respective figures of $362.7 million and $98.2 million as of Sep 24, 2023.

Guidance

For first-quarter 2024, the company expects organic sales to increase in the range of 1. The adjusted operating margin is estimated to be between 17% and 17.6%, while the adjusted margin is projected to decrease in the range of 20 bps-80 bps. The company expects the free cash flow performance to be seasonally slow.

For 2024, Watts Water expects organic sales to be down 5% to increase 1%. The adjusted operating margin is estimated to be between 16.9% and 17.5%. The adjusted margin is expected to fall between 30 bps and 90 bps.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month.

The consensus estimate has shifted 6.11% due to these changes.

VGM Scores

Currently, Watts Water has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. 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 B. 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 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 belongs to the Zacks Instruments - Control industry. Another stock from the same industry, Woodward (WWD Quick QuoteWWD - Free Report) , has gained 7.1% over the past month. More than a month has passed since the company reported results for the quarter ended December 2023.

Woodward reported revenues of $786.73 million in the last reported quarter, representing a year-over-year change of +27.2%. EPS of $1.45 for the same period compares with $0.49 a year ago.

Woodward is expected to post earnings of $1.29 per share for the current quarter, representing a year-over-year change of +27.7%. Over the last 30 days, the Zacks Consensus Estimate has changed +1.1%.

The overall direction and magnitude of estimate revisions translate into a Zacks Rank #2 (Buy) for Woodward. Also, the stock has a VGM Score of C.