A month has gone by since the last earnings report for Watts Water (WTS - Free Report) . Shares have lost about 3.5% in that time frame, outperforming 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 drivers.
Watts Water Q1 Earnings Beat Estimates, Revenues Match
Watts Water reported healthy first-quarter 2019 financial results, mainly driven by strong operating performance in the Americas, resulting in year-over-year growth in sales and profitability.
On a reported basis, quarterly net income was $31 million or 91 cents per share compared with $28.2 million or 82 cents per share in the year-ago quarter. The improvement was primarily driven by price, volume, productivity, lower effective tax rate and reduced interest costs. However, the momentum was partly offset by inflation, higher tariff costs, growth investments and a negative impact in foreign exchange.
Adjusted net income came in at $32 million or 94 cents per share compared with $28.2 million or 82 cents per share a year ago. The bottom line beat the Zacks Consensus Estimate by a penny.
On a reported basis, quarterly net sales increased 2.7% year over year to $388.7 million, driven by pricing actions and organic volume in the Americas and Europe. The top line matched the Zacks Consensus Estimate.
Organic sales jumped 6% year over year. Regionally, organic sales in the Americas increased 8%, driven by broad growth in plumbing, heating and hot water, drains and water quality products; however partly offset by negative foreign exchange. Organic sales improved 3% in Europe owing to strength in drains business and one additional shipping day in the reported quarter as compared to the preceding year. Asia Pacific Middle East and Africa (APMEA) saw a decline of 3% as sales in the Middle East, Australia and in China’s commercial valves market were more than offset by softness in Korea and China’s residential heating market.
Americas: Net sales increased 7.4% to $258.9 million in the first quarter. Adjusted operating income increased 18.4% to $43.1 million.
Europe: Net sales decreased 5.4% to $116.3 million, affected by negative foreign exchange movements. The segment’s adjusted operating income was $14.6 million compared with $14.9 million in the year-ago quarter.
APMEA: Net sales decreased 6.3% to $13.5 million. Adjusted operating income came in at $1.3 million compared with $1.4 million in the prior-year quarter.
Cost of goods sold went up 1.2% year over year to $224.5 million. Gross profit increased 4.8% to $164.2 million. Operating income was $46.7 million, up 6.4%. Operating margin was up 40 basis points (bps) to 12%. Adjusted operating margin came in at 12.4%, up 80 bps.
Cash Flow and Liquidity
During first-quarter 2019, Watts Water utilized $24.2 million of net cash from operating activities compared with a cash utilization of $26.1 million in the year-ago period. As of Mar 31, 2019, the company had $170.2 million in cash and equivalents with $341.1 million of long-term debt (net of current portion).
Watts Water repurchased about 74,000 shares of Class A common stock for $5.6 million during the first quarter. It repatriated $11 million in cash during the quarter and used it to pay down revolving debt.
Watts Water is focused on accelerating organic growth, drive margin expansion and reinvest in future growth and productivity initiatives. The company intends to launch smart and connected product strategy in 2019, which is likely to provide it with further differentiation in the marketplace. Also, it is committed to enhancing shareholder value and executing its balanced cash allocation strategy while following its long-term growth strategy of driving the business organically and through acquisitions.
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 subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% 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.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Watts Water has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.