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Watts Water (WTS) Up 7.9% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Watts Water (WTS - Free Report) . Shares have added about 7.9% in that time frame, outperforming 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 catalysts.

Watts Water Q4 Earnings and Revenues Beat, Increase Y/Y

Watts Water reported healthy fourth-quarter 2018 financial results, mainly driven by strong operating performance in the Americas, resulting in year-over-year growth in sales and profitability. Both the top line and the bottom line surpassed the respective Zacks Consensus Estimate.

Net Income

On a reported basis, quarterly net income was $29.1 million or 85 cents per share against loss of $2.3 million or loss of 7 cents per share in the year-ago quarter. The year-over-year improvement was primarily driven by top-line growth and lower provision for income taxes. For full-year 2018, net income was $124.8 million or $3.64 per share compared with $73.1 million or $2.12 per share in 2017.

Adjusted net income came in at $30.1 million or 88 cents per share compared with $25.4 million or 74 cents per share a year ago. The bottom line beat the consensus estimate by 1 cent.

Revenues

On a reported basis, quarterly net sales increased 5.8% year over year to $387.6 million, primarily driven by strong organic growth in the Americas and Europe. The top line surpassed the Zacks Consensus Estimate of $383 million. For full-year 2018, net sales increased 7.4% to $1,564.9 million.

Quarterly organic sales jumped 7% year over year. Regionally, organic sales in the Americas increased 10%, driven by broad growth in plumbing, drains, electronics, water quality and heating and hot water products. Organic sales improved 3% in Europe owing to strength in drains and electronics businesses. Asia Pacific Middle East and Africa (APMEA) saw a decline of 4% as gains in greater Asia and the Middle East and Africa were more than offset by continued weakness in China.

Segmental Performance

Americas: Net sales increased 9.7% to $256.3 million in the reported quarter. Adjusted operating income increased 13.8% to $43 million.

Europe: Net sales were almost flat year over year at $115.3 million. The segment’s adjusted operating income was $12.6 million compared with $11.8 million in the year-ago quarter.

APMEA: Net sales decreased 5.9% to $16 million. Adjusted operating income came in at $1.8 million compared with $1.4 million in the prior-year quarter.

Other Quarterly Details

Cost of goods sold went up 2.1% year over year to $221.7 million. Gross profit increased 11.2% to $165.9 million. Operating income was $45.4 million, up 21.1%. Operating margin was up 150 basis points (bps) to 11.7%, primarily due to reduced restructuring and impairment charges in 2018. Adjusted operating margin came in at 11.7%, up 30 bps.

Cash Flow and Liquidity

During full-year 2018, Watts Water generated $169.4 million of cash from operating activities compared with $155.9 million in 2017. As of Dec 31, 2018, the company had $204.1 million of cash and cash equivalents with $323.4 million as long-term debt (net of current portion) compared with the respective tallies of $280.2 million and $474.6 million a year ago. Net debt-to-capitalization ratio was 14.4%.

The company repurchased around 144,000 shares of Class A common stock for approximately $10.5 million during the fourth quarter. For 2018, almost 340,000 shares were purchased for about $26 million.

Going Forward

Watts Water remains focused on accelerating organic growth, drive margin expansion and reinvest in future growth and productivity initiatives. The company aims to launch smart and connected product strategy in 2019, which is likely to provide it with further differentiation in the marketplace. Furthermore, Watts Water is committed to enhancing shareholder value and executing its balanced cash allocation strategy while following its long-term growth strategy of growing the business organically and through acquisitions. We remain impressed with its solid growth potential.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

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. However, the stock was allocated a grade of B on the value side, putting it in the top 40% 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 broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. 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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