Watts Water Technologies (WTS)

Water management manufacturer Watts Water (NYSE:WTS) announced better-than-expected revenue in Q1 CY2025, but sales fell by 2.3% year on year to $558 million. Its non-GAAP profit of $2.37 per share was 11.3% above analysts’ consensus estimates.

Company Overview

Founded in 1874, Watts Water (NYSE:WTS) specializes in manufacturing water products and systems for residential, commercial, and industrial applications globally.

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.

Competitors offering similar products include Mueller Water Products (NYSE:MWA), A.O. Smith (NYSE:AOS), and Pentair (NYSE:PNR).

A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Watts Water Technologies grew its sales at a mediocre 7% compounded annual growth rate. This wasn’t a great result compared to the rest of the industrials sector, but there are still things to like about Watts Water Technologies.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Watts Water Technologies’s annualized revenue growth of 6.1% over the last two years aligns with its five-year trend, suggesting its demand was consistently weak.

Watts Water Technologies also reports organic revenue, which strips out one-time events like acquisitions and currency fluctuations that don’t accurately reflect its fundamentals. Over the last two years, Watts Water Technologies’s organic revenue was flat. 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 results.

This quarter, Watts Water Technologies’s revenue fell by 2.3% year on year to $558 million but beat Wall Street’s estimates by 1.9%.

Looking ahead, sell-side analysts expect revenue to grow 1.4% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and suggests its products and services will face some demand challenges. At least the company is tracking well in other measures of financial health.

Watts Water Technologies has best-in-class unit economics for an industrials company, enabling it to invest in areas such as research and development. Its margin also signals it sells differentiated products, not commodities. As you can see below, it averaged an elite 45% gross margin over the last five years. Said differently, roughly $44.98 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

This quarter, Watts Water Technologies’s gross profit margin was 48.8%, up 2 percentage points year on year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.

Watts Water Technologies has been an efficient company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 15.5%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Watts Water Technologies’s operating margin rose by 4.5 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, Watts Water Technologies generated an operating profit margin of 15.7%, down 1.2 percentage points year on year. Conversely, its gross margin actually rose, so we can assume its recent inefficiencies were driven by increased operating expenses like marketing, R&D, and administrative overhead.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Watts Water Technologies’s EPS grew at a spectacular 16.9% compounded annual growth rate over the last five years, higher than its 7% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into the nuances of Watts Water Technologies’s earnings can give us a better understanding of its performance. As we mentioned earlier, Watts Water Technologies’s operating margin declined this quarter but expanded by 4.5 percentage points over the last five years. Its share count also shrank by 1.8%, and these factors together are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we 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 9.5% was lower than its five-year trend. This wasn’t great, but at least the company was successful in other measures of financial health.

In Q1, Watts Water Technologies reported EPS at $2.37, up from $2.33 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Watts Water Technologies’s full-year EPS of $8.91 to grow 4%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Watts Water Technologies has shown robust cash profitability, enabling it to comfortably ride out cyclical downturns while investing in plenty of new offerings and returning capital to investors. The company’s free cash flow margin averaged 12.2% over the last five years, quite impressive for an industrials business.

Taking a step back, we can see that Watts Water Technologies’s margin was unchanged during that time, showing its long-term free cash flow profile is stable.

Watts Water Technologies’s free cash flow clocked in at $45.6 million in Q1, equivalent to a 8.2% margin. This result was good as its margin was 2 percentage points higher than in the same quarter last year, but we note it was lower than its five-year cash profitability. Nevertheless, we wouldn’t put too much weight on a single quarter because investment needs can be seasonal, causing short-term swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Watts Water Technologies’s five-year average ROIC was 18%, placing it among the best industrials companies. This illustrates its management team’s ability to invest in highly profitable ventures and produce tangible results for shareholders.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Fortunately, Watts Water Technologies’s ROIC averaged 4 percentage point increases over the last few years. This is a great sign when paired with its already strong returns. It could suggest its competitive advantage or profitable growth opportunities are expanding.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Watts Water Technologies is a profitable, well-capitalized company with $336.8 million of cash and $197.2 million of debt on its balance sheet. This $139.6 million net cash position gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We enjoyed seeing Watts Water Technologies beat analysts’ organic revenue expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. Zooming out, we think this quarter featured some important positives. The stock remained flat at $211.58 immediately following the results.

Updated: July 7, 2025 at 11:40 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Watts Water Technologies.

There are things to like about Watts Water Technologies. Although its revenue growth was mediocre over the last five years and analysts expect growth to slow over the next 12 months, its admirable gross margins indicate the mission-critical nature of its offerings. And while its flat organic revenue disappointed, its spectacular EPS growth over the last five years shows its profits are trickling down to shareholders.

Watts Water Technologies’s P/E ratio based on the next 12 months is 27x. At this valuation, there’s a lot of good news priced in. Watts Water Technologies is a good one to add to your watchlist - there are companies featuring superior fundamentals at the moment.

Wall Street analysts have a consensus one-year price target of $237.20 on the company (compared to the current share price of $249.96).