Water management manufacturer Watts Water (NYSE:WTS) announced better-than-expected results in Q2 CY2024, with revenue up 12.1% year on year to $597.3 million. It made a non-GAAP profit of $2.46 per share, improving from its profit of $2.34 per share in the same quarter last year.
Is now the time to buy Watts Water Technologies? Find out by accessing our full research report, it's free.
Watts Water Technologies (WTS) Q2 CY2024 Highlights:
- Revenue: $597.3 million vs analyst estimates of $589.6 million (1.3% beat)
- EPS (non-GAAP): $2.46 vs analyst estimates of $2.33 (5.6% beat)
- Gross Margin (GAAP): 47.7%, in line with the same quarter last year
- Free Cash Flow of $78.5 million, up 121% from the previous quarter
- Organic Revenue was flat year on year, in line with the same quarter last year
- Market Capitalization: $6.55 billion
Chief Executive Officer Robert J. Pagano Jr. commented, “We delivered another quarter that surpassed our expectations with record sales, operating income and EPS. We are pleased with the growth and execution in our Americas and APMEA regions, which more than offset market weakness in Europe. Our success is a direct result of our team’s unwavering commitment to serving our customers worldwide.”
Founded in 1874, Watts Water (NYSE:WTS) specializes in manufacturing water products and systems for residential, commercial, and industrial applications globally.
Water Infrastructure
Trends towards conservation and reducing groundwater depletion are putting water infrastructure and treatment products front and center. Companies that can innovate and create solutions–especially automated or connected solutions–to address these thematic trends will create incremental demand and speed up replacement cycles. On the other hand, water infrastructure and treatment companies are at the whim of economic cycles. Consumer spending and interest rates, for example, can greatly impact the industrial production that drives demand for these companies’ offerings.
Sales Growth
A company’s long-term performance can indicate its business quality. Any business can put up a good quarter or two, but many enduring ones tend to grow for years. Regrettably, Watts Water Technologies's sales grew at a mediocre 7% compounded annual growth rate over the last five years. This shows it couldn't expand in any major way and is a tough starting point for our analysis. 
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Watts Water Technologies's annualized revenue growth of 7.6% over the last two years aligns with its five-year trend, suggesting its demand was stable.
We can better understand the company's sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations because they don't accurately reflect its fundamentals. Over the last two years, Watts Water Technologies's organic revenue averaged 4% year-on-year growth. Because this number is lower than its normal revenue growth, we can see that some mixture of acquisitions and foreign exchange rates boosted its headline performance. 
This quarter, Watts Water Technologies reported robust year-on-year revenue growth of 12.1%, and its $597.3 million of revenue exceeded Wall Street's estimates by 1.3%. Looking ahead, Wall Street expects sales to grow 3.2% over the next 12 months, a deceleration from this quarter.
Unless you’ve been living under a rock, it should be obvious by now that generative AI is going to have a huge impact on how large corporations do business. While Nvidia and AMD are trading close to all-time highs, we prefer a lesser-known (but still profitable) semiconductor stock benefitting from the rise of AI. Click here to access our free report on our favorite semiconductor growth story.
Operating Margin
Watts Water Technologies has been an optimally-run company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 14.9%. This result isn't surprising as its high gross margin gives it a favorable starting point.
Analyzing the trend in its profitability, Watts Water Technologies's annual operating margin rose by 5.3 percentage points over the last five years, showing its efficiency has meaningfully improved.
In Q2, Watts Water Technologies generated an operating profit margin of 18.7%, in line with the same quarter last year. This indicates the company's cost structure has recently been stable.
EPS
Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.
Watts Water Technologies's EPS grew at an astounding 17.7% compounded annual growth rate over the last five years, higher than its 7% annualized revenue growth. This tells us the company became more profitable as it expanded.
Diving into Watts Water Technologies's quality of earnings can give us a better understanding of its performance. As we mentioned earlier, Watts Water Technologies's operating margin was flat this quarter but expanded by 5.3 percentage points over the last five years. On top of that, its share count shrank by 2%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth. 
Like with revenue, we also analyze EPS over a shorter period to see if we are missing a change in the business. For Watts Water Technologies, its two-year annual EPS growth of 15.9% was lower than its five-year trend. We still think its growth was good and hope it can accelerate in the future.
In Q2, Watts Water Technologies reported EPS at $2.46, up from $2.34 in the same quarter last year. This print beat analysts' estimates by 5.6%. Over the next 12 months, Wall Street expects Watts Water Technologies to perform poorly. Analysts are projecting its EPS of $8.80 in the last year to shrink by 1.9% to $8.63.
Key Takeaways from Watts Water Technologies's Q2 Results
We enjoyed seeing Watts Water Technologies exceed analysts' organic revenue expectations this quarter. We were also glad its revenue outperformed Wall Street's estimates. Overall, we think this was a solid quarter with some key areas of upside. The stock remained flat at $193.73 immediately after reporting.
So should you invest in Watts Water Technologies right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.