A month has gone by since the last earnings report for Watts Water (WTS). Shares have added about 12.8% 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 the most recent earnings report in order to get a better handle on the important drivers.
Watts Water's Q3 Earnings & Revenues Top
Watts Water reported third-quarter 2022 adjusted earnings of $1.79 per share, which increased 29% on a year-over-year basis and beat the Zacks Consensus Estimate by 14%.
The company’s quarterly net sales rose 7% year over year to $488 million. The top line surpassed the consensus estimate by 2.5%. Organic sales increased 12% year over year.
Amid pandemic-induced supply chain woes, double-digit organic growth in the Americas and solid improvement in Asia boosted Watts Water’s third-quarter 2022 results. However, unfavorable forex translations affected sales by $21 million
Americas: Net sales increased 13% year over year to $350 million. Organic sales also rose 13% on higher pricing across all major product lines. Adjusted operating income was up 380 basis points (bps) year over year to 21.9%, driven by increased price and productivity initiatives, which were partly offset by inflation and higher investments.
Europe: Net sales were down 9% year over year to $113 million, including an unfavorable foreign exchange impact of 15%. Organic sales were up 6%, with growth witnessed across all platforms, primarily driven by price actions. Adjusted operating income was down 320 bps year over year to 12.3%, owing to lower volume, inflationary impact and unfavorable forex volatility.
Asia-Pacific, Middle East and Africa: Net sales increased 14% to $25 million. Organic sales moved up 22% from growth in New Zealand, China and Australia. The unfavorable foreign exchange impact was 8%. Adjusted operating margin was down 260 bps to 16.5%, affected by lower affiliate volume and inflationary pressure
Gross profit increased 12.3% year over year to $217.9 million. Selling, general and administrative expenses increased 5.8% year over year to $135.8 million. Operating income was $80.4 million, up 24.3%.
GAAP operating margin was up 230 bps to 16.5%. The adjusted operating margin was 16.8%, up 240 bps.
Cash Flow & Liquidity
For nine months ended Sep 25, Watts Water generated $86.3 million of cash from operating activities compared with $134.9 million cash generated in the prior-year quarter.
Free cash flow was $67 million, down from $120.2 million reported in the year-ago quarter. The downtick stemmed from the company’s decision to boost inventories in response to a solid demand environment amid protracted supply chain challenges along with higher payments related to restructuring, employee and customer incentives.
The company repurchased 29,000 shares for $4 million in the third quarter. For the first nine months of 2022, the company repurchased 463,000 shares worth $65 million.
As of Sep 25, 2022, the company had $219.5 million in cash and cash equivalents with $182.4 million of long-term debt compared with the respective figures of $230 million and $202.2 million as of Jun 26.
For fourth-quarter 2022, the company expects organic sales growth to be in the range of 5-8%. The adjusted operating margin is estimated to rise between 13.7% and 14.2%, with adjusted margin growth of 30-80 bps. The company expects operating cash flow and free cash flow performance to improve in the fourth quarter of 2022 due to normal seasonality.
For full-year 2022, Watts Water expects organic sales growth to be in the range of 11-12% compared with the earlier range of 8-11%. The adjusted operating margin is now estimated to be between 16.2% and 16.4%, with adjusted margin growth between 190 bps and 210 bps. Earlier, the company had guided the adjusted operating margin to be between 15.4% and 15.9%, with adjusted margin growth between 110 bps and 160 bps.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended upward during the past month.
The consensus estimate has shifted 8.25% due to these changes.
Currently, Watts Water has an average Growth Score of C, though it is lagging a bit 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.
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 is part of the Zacks Instruments - Control industry. Over the past month, Sensata (ST), a stock from the same industry, has gained 17.8%. The company reported its results for the quarter ended September 2022 more than a month ago.
Sensata reported revenues of $1.02 billion in the last reported quarter, representing a year-over-year change of +7.1%. EPS of $0.85 for the same period compares with $0.87 a year ago.
Sensata is expected to post earnings of $0.88 per share for the current quarter, representing a year-over-year change of +1.2%. Over the last 30 days, the Zacks Consensus Estimate remained unchanged.
Sensata has a Zacks Rank #4 (Sell) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of C.
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