It has been about a month since the last earnings report for Watts Water (WTS). Shares have added about 2.2% in that time frame, underperforming 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’s Q3 Earnings Beat on Cost Reductions
Watts Water reported decent third-quarter 2020 results, wherein the top and the bottom lines beat the respective Zacks Consensus Estimate.
Net Income
On a reported basis, quarterly net income was $32.9 million or 97 cents per share compared with $32.3 million or 94 cents per share in the year-ago quarter. The improvement was supported by cost reductions and lower provision for income tax.
Adjusted net income came in at $35.6 million or $1.05 per share compared with $35.6 million or $1.04 per share in the prior-year quarter. The bottom line beat the Zacks Consensus Estimate by 16 cents, delivering a positive surprise of 18%.
Revenues
On a reported basis, quarterly net sales slipped 2.7% year over year to $383.9 million, primarily due to COVID-19-led volume reductions. Nevertheless, the top line surpassed the consensus estimate of $362 million. Organic sales decreased 5% year over year.
Segment Results
Americas: Net sales fell 3.3% year over year to $261.5 million. Organic sales declined 4% due to a fall in heating and hot water, plumbing and drains products. Adjusted operating income fell 1.4% to $48.2 million.
Europe: Net sales declined 1.1% year over year to $106.7 million, including a positive impact of 5% from foreign exchange movements. Organic sales were down 6%, with declines in most regions and product lines resulting from COVID-19. Adjusted operating income was $12.1 million, stable year over year. This was positively impacted by cost reduction actions and productivity initiatives.
APMEA: Net sales declined 4.8% to $15.7 million. Organic sales decreased 22%, with sales generally down in most regions due to the pandemic. Adjusted operating income came in at $2.4 million compared with $1.4 million in the prior-year quarter. The improvement was driven by cost reduction actions and productivity initiatives as well as higher affiliate volume, which were partly offset by lower third-party volume.
Other Details
Cost of goods sold was $225.4 million compared with $226.1 million in the year-ago quarter. Gross profit declined to $158.5 million from $168.6 million. Reported operating income was $47.9 million, down 1.8%. GAAP operating margin was up 10 basis points (bps) to 12.5%. Adjusted operating margin was 13.8%, up 50 bps.
The company incurred $3.4 million in restructuring and other related costs. It repurchased about 41,000 shares for $3.7 million during the third quarter.
Cash Flow & Liquidity
In the first nine months of 2020, Watts Water generated $127.4 million of net cash from operating activities compared with $94.9 million in the year-ago period. For the same period, free cash flow was $95.1 million compared with $75.9 million a year ago. As of Sep 27, the company had $188.3 million in cash and cash equivalents with $247.9 million of long-term debt (net of current portion).
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates review. The consensus estimate has shifted 11.88% due to these changes.
VGM Scores
At this time, Watts Water has a strong Growth Score of A, a grade with the same score on the momentum front. However, 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 A. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
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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Watts Water Technologies, Inc. (WTS): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
