A month has gone by since the last earnings report for Watts Water (WTS Quick QuoteWTS - Free Report) . Shares have lost about 5.7% 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 its latest earnings report in order to get a better handle on the important drivers.

Watts Water Q2 Earnings Beat Estimates on Data Center Demand

Watts Water reported second-quarter 2026 adjusted earnings of $3.66 per share, up 18.4% from $3.09 a year ago. The bottom line beat the Zacks Consensus Estimate of $3.34 by 9.6%.

Net sales rose 18.6% year over year to $763.2 million and topped the consensus mark of $726 million by 5.1%. Organic sales advanced 12.2%, driven by favorable pricing, higher volumes and data center growth. Year-to-date data center sales represented 8% of total sales.

Data Center Momentum Accelerates

Second-quarter data center sales more than tripled year over year. Demand was concentrated in the Americas and APMEA, while Europe represented an emerging opportunity. Management said project-based demand could create quarter-to-quarter variability.

Watts Water is investing in talent, product innovation and capacity while expanding relationships with contractors, original equipment manufacturers and hyperscalers. The company estimates its served addressable data center market at about $2 billion, with potential content ranging from roughly $25,000 to $100,000 per megawatt.

Americas Demand Supports Growth

Americas sales increased 17.4% year over year to $585 million and rose 11.6% organically. Favorable pricing and higher volumes tied to data center demand supported the increase, while acquisitions added $28 million.

Segment margin fell 150 basis points (bps) to 25.7%. Acquisition dilution, inflation, tariffs and a difficult comparison with a prior-year tariff-related price-cost benefit outweighed gains from pricing, volume leverage and productivity.

Europe and APMEA Results Strengthen

Europe sales rose 12.3% to $124.6 million, including 9.2% organic growth.

Higher volumes and favorable pricing drove the advance, while foreign exchange contributed 3.1%. Segment margin expanded 160 bps to 13.3% as operating gains more than offset inflation.

APMEA sales climbed 56.7% to $53.6 million and advanced 30.7% organically.

Data center growth in China more than offset weaker Middle East activity. Acquisitions contributed 17.3% and foreign exchange added 8.7%, while segment margin improved 100 bps to 19.9%.

Profitability Faces Cost Pressure

Gross profit increased 14.8% to $374.1 million, though gross margin contracted 160 bps to 49.0%. Selling, general and administrative expenses rose 14.6% to $214.5 million.

Adjusted operating income increased 15% to $160 million, while adjusted operating margin declined 60 bps to 21.0%. Adjusted EBITDA rose 15.5% to $176.7 million, but its margin decreased 70 bps to 23.1%. Acquisition dilution, inflation and tariffs pressured profitability, partly offset by price realization, volume leverage and productivity.

Cash Flow Softens as Balance Sheet Holds

For the first six months of 2026, operating cash flow declined to $120.8 million from $124.9 million. Free cash flow decreased to $98.2 million from $105.1 million, reflecting higher working capital and capital expenditures. The cash conversion rate fell to 45.1% from 60.1%.

Watts Water ended June with $347.9 million in cash and $108 million of long-term debt, resulting in net cash of $239.9 million. The company repurchased about 13,000 shares for $4.1 million during the quarter, leaving roughly $121 million under its authorization. Management expects cash flow to improve sequentially in the second half as working capital is monetized.

2026 Outlook

WTS now expects full-year reported sales growth of 14% to 17%, up from its prior 8% to 12% range. Organic growth is projected at 8% to 11% compared with the previous 2% to 6% outlook. Adjusted operating margin is forecast between 19.8% and 20.4%, while adjusted EBITDA margin is expected between 22.1% and 22.7%.

For the third quarter, management expects reported sales growth of 11% to 14% and organic growth of 5% to 8%. Adjusted operating margin is projected between 19.8% and 20.4%, with adjusted EBITDA margin of 22.2% to 22.8%. The outlook assumes no change in the Middle East conflict's impact and includes tariffs announced through Aug. 4, 2026.

On Aug. 3, 2026, WTS also declared a quarterly dividend of 63 cents per share, payable on Sept. 15, 2026, to shareholders of record as of Sept. 1, 2026.

How Have Estimates Been Moving Since Then?

Since the earnings release, investors have witnessed a upward trend in fresh estimates.

The consensus estimate has shifted 6.88% due to these changes.

VGM Scores

At this time, Watts Water has a average Growth Score of C, a score with the same score on the momentum front. However, the stock was allocated a score of F on the value side, putting it in the lowest quintile 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 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.