It has been about a month since the last earnings report for Watts Water (WTS - Free Report) . Shares have lost about 4.1% 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 most recent earnings report in order to get a better handle on the important catalysts.
Watts Water Earnings & Revenues Beat Estimates in Q2
Watts Water Technologies delivered second-quarter 2018 adjusted earnings of $1.05 per share, up 26.5% year over year. The improvement was driven by strong operating performance in the Americas. Earnings also surpassed the Zacks Consensus Estimate of $1.01.
On a reported basis, Watts Water’s earnings per share improved 33% to $1.05 in the second quarter compared with 79 cents in the year-ago quarter. In the quarter, a lower effective tax rate, lower non-operating expenses as well as a favorable foreign exchange had a positive impact on the earnings.
Total revenues were up 8% year over year to $407.9 million in the reported quarter on the back of solid productivity initiatives. Notably, it beat the Zacks Consensus Estimate of $402 million. Organic sales were up 5% year over year.
Regionally, organic sales improved 8% in the Americas, driven by continued growth in plumbing, water quality as well as heating and hot water products. Organic sales decreased 2% in Europe owing to decline in water, plumbing and HVAC products. APMEA’s organic sales went up 5%.
Cost and Margins
Cost of sales went up 7.5% year over year to $238.5 million. Gross profit increased 8.1% to $169.4 million. Gross margin in the reported quarter expanded 10 basis points to 41.5%. Selling, general and administrative expenses were up to $117.2 million from $110.2 million posted in the prior-year quarter. Adjusted operating profit jumped 16.5% to $52.2 million in the reported quarter.
Americas: Net sales increased 8.6% to $272 million in the reported quarter. Adjusted operating profit increased 18% to $46.7 million.
Europe: Net sales were up 5.8% year over year to $117.1 million. The segment reported adjusted operating profit of $12.9 million compared with $12.7 million recorded in the year-ago quarter.
APMEA: Net sales went up 8.7% year over year to $18.8 million. Adjusted operating profit came in at $1.6 million compared with $1.8 million recorded in the year-ago quarter.
Watts Water reported cash and cash equivalents of $142.6 million at the end of the second quarter, down from $280.2 million recorded at the end of 2017. Net cash provided by operating activities came in at $1.5 million at the end of the second quarter compared with $9 million a year ago.
Net debt was at $266.6 million as of Jul 1, 2018, up from $216.9 million as of Dec 31, 2017. Consequently, the net debt-to-capitalization ratio increased to 23.7% as of Jul 1, 2018 from 20.7% as of Dec 31, 2017.
The company repurchased around 59,000 shares of Class A common stock for $4.5 million during the second quarter.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
Currently, Watts Water has a nice Growth Score of B, a grade with the same score on the momentum front. 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.
Based on our scores, the stock is equally suitable for growth and momentum investors while value investors may want to look elsewhere.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Interestingly, Watts Water has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.