Watts Water (WTS) Down 10.9% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Watts Water (WTS). Shares have lost about 10.9% 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 catalysts.

Watts Water Beats Q4 Earnings & Revenue Estimates

Watts Water reported healthy fourth-quarter 2019 results, wherein the bottom line and the top line surpassed the respective Zacks Consensus Estimate. The North Andover, MA-based company achieved its goals for 2019 to drive organic sales growth and margin expansion, and continued to reinvest in future growth, especially in its smart and connected products.

Net Income

On a reported basis, quarterly net income was $31.8 million or 93 cents per share compared with $32.3 million or 94 cents per share in the year-ago quarter. Better operating performances in all regions and lower net interest costs was more than offset by increased restructuring and other costs.

For 2019, net income was $131.5 million or $3.85 per share compared with $128 million or $3.73 per share in 2018. The improvement was backed by solid operating performance in the Americas and lower net interest costs, partly offset by restructuring and other costs and reduced foreign currency gains.

Fourth-quarter adjusted net income came in at $34.2 million or $1 per share compared with $30.1 million or 88 cents per share in the year-ago quarter. The bottom line surpassed the Zacks Consensus Estimate by 2 cents.

Revenues

On a reported basis, quarterly net sales increased 3.3% year over year to $400.3 million, driven by organic growth in all regions. The top line surpassed the Zacks Consensus Estimate of $397 million. For 2019, net sales improved 2.3% year over year to $1,600.5 million.

Organic sales grew 4% year over year. Regionally, organic sales in the Americas increased 4%, led by growth in plumbing, drains, electronics, water quality and hot water products. Organic sales improved 2% in Europe owing to strength in the company’s drains and electronics businesses. Asia-Pacific, Middle East and Africa (APMEA) saw a jump of 20% with gains in China, Korea and the Middle East.

Quarterly Segment Results

Americas: Net sales increased 4.5% (including 1% from acquisition) year over year to $267.9 million in the December quarter. Adjusted operating income increased 5.8% to $45.5 million as benefits from price, volume, and productivity savings were partly offset by growth investments and inflation.

Europe: Net sales decreased 1.5% to $113.6 million, impacted by negative foreign exchange movements. The segment’s adjusted operating income was $13.4 million compared with $12.6 million in the year-ago quarter. This reflects benefit from increased price, volume and productivity including gains from restructuring programs.

APMEA: Net sales increased 17.5% to $18.8 million. Adjusted operating income came in at $3 million compared with $1.8 million in the prior-year quarter. This is supported by an increase in third party volume, better product mix, productivity and cost controls, partly offset by lower intercompany volume, growth investments and inflation.

Other Details

Cost of goods sold in the fourth quarter went up 3.8% year over year to $230.2 million. Gross profit increased 2.5% to $170.1 million driven by top-line growth. Operating income was $47.3 million, up 4.2%. GAAP operating margin was up 10 basis points (bps) to 11.8%. Adjusted operating margin came in at 12.5%, up 80 bps.

Cash Flow & Liquidity

In 2019, Watts Water generated $194 million of net cash from operating activities compared with $169.4 million in 2018. As of Dec 31, 2019, the company had $219.7 million in cash and equivalents with $204.2 million of long-term debt (net of current portion), compared with the respective tallies of $204.1 million and $323.4 million a year ago.

Watts Water repurchased about 49,000 shares for $4.7 million during the quarter. It repatriated $5.5 million in cash during the quarter. For 2019, $43 million was repatriated, a majority of which was used to pay down revolving debt.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -8.05% due to these changes.

VGM Scores

At this time, Watts Water has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. 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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions 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.