It has been about a month since the last earnings report for Watts Water (WTS). Shares have lost about 2.8% 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 the most recent earnings report in order to get a better handle on the important drivers.
Watts Water Q4 Earnings & Revenues Top, Increase Y/Y
Watts Water reported fourth-quarter 2022 adjusted earnings of $1.60 per share, which increased 13% on a year-over-year basis and beat the Zacks Consensus Estimate by 3.9%.
The company’s quarterly net sales rose 6% year over year to $502 million. The top line surpassed the Zacks Consensus Estimate by 2.7%. Organic sales increased 11% year over year.
Amid pandemic-induced supply-chain woes, double-digit organic growth in the Americas boosted Watts Water’s fourth-quarter 2022 results. However, unfavorable forex translations affected sales by $22 million.
Americas: Net sales increased 10% year over year to $350 million. Organic sales also rose 11% on higher pricing across all major product lines. Adjusted operating income was up 240 basis points (bps) year over year to 18.7%, driven by increased price and productivity initiatives, which were partly offset by inflation and higher investments.
Europe: Net sales were down 4% year over year to $128 million, including an unfavorable foreign exchange impact of 13%. Organic sales were up 9%, with growth witnessed across all platforms, primarily driven by price actions. Adjusted operating income was down 290 bps year over year to 12.8%, owing to inflationary impact and unfavorable forex volatility.
Asia-Pacific, the Middle East and Africa: Net sales increased 5% to $23 million. Organic sales moved up 17% from China, the Middle East and Australia. The unfavorable foreign exchange impact was 12%. Adjusted operating margin was down 260 bps to 14.4%, affected by lower affiliate volume and inflationary pressure.
Gross profit increased 9.7% year over year to $218.6 million. Selling, general and administrative expenses increased 8.4% year over year to $147 million. Operating income was $67.2 million, up 7.4%.
GAAP operating margin was up 20 bps to 13.4%. The adjusted operating margin was 14.3%, up 90 bps.
Cash Flow & Liquidity
For the year ended Dec 31, 2022, Watts Water generated $224 million of cash from operating activities compared with $180.8 million generated in the previous year.
Free cash flow was $201.1 million, up from $159.2 million reported in the previous year. The increase was due to higher net income and lower investment in inventory.
The company repurchased 31,000 shares for $4.3 million in the fourth quarter. For the year, the company repurchased 494,000 shares worth $69 million.
As of Dec 31, 2022, the company had $310.8 million in cash and cash equivalents with $147.6 million of long-term debt compared with the respective figures of $219.5 million and $182.4 million as of Sep 25, 2022.
For first-quarter 2023, the company expects organic sales to remain flat to increase 4%. The adjusted operating margin is estimated to rise between 15.7% and 16.2%, with adjusted margin growth in the range of 0-50 bps. The company expects free cash flow performance to be weak due to seasonality.
For full-year 2023, Watts Water expects organic sales to be down 5% to increase 2%. The adjusted operating margin is now estimated to be between 15.4% and 16%, with adjusted margin to be down between 40 bps and 100 bps.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended upward during the past month.
At this time, 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 B. 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. 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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