Watts Water To Gain From Productivity Initiatives Amid Risks

On Dec 2, we issued an updated research report on Watts Water Technologies, Inc. (NYSE:WTS) . Shares of the company have gained 49.7% so far this year compared with the industry’s growth of 32.9%.

Watts Water is focused on accelerating organic growth, driving margin expansion and reinvesting in productivity initiatives. It topped earnings estimates thrice in the trailing four quarters, delivering an average beat of 0.6%. The Zacks Consensus Estimate for its next-year earnings has been revised 0.5% upward over the past 30 days.

The company is committed to enhancing shareholder value and executing a balanced cash allocation policy while following its long-term strategy of expanding the business organically and through acquisitions. At October end, Watts Water communicated that it has completed the purchase of all the assets of Backflow Direct LLC. Based in Rancho Cordova, CA, Backflow Direct specializes in the manufacture of backflow prevention valves used mainly in fire protection applications. The buyout has enabled Watts Water to better meet the needs of customers through a broader product offering and enhance its R&D efforts.

Watts Water has long-term earnings growth expectation of 8%. Over the last few years, it has been building a smart and connected foundation by expanding its internal capabilities. In 2018, the company began accelerating its initiatives by investing in IoT architecture and launching several new product development projects. Watts Water intends to introduce products that will connect its customers with smart systems for optimal performance, and conserve critical resources by increasing efficiency and safety. Its goal is to derive 25% of consolidated revenues from smart and connected products by 2023.

Further, the company’s focus on differentiated products and solutions will likely provide it with greater opportunity to distinguish itself in the market place. Watts Water’s operating margin expansion is likely to benefit from volume and productivity increment efforts, including restructuring savings. It believes APMEA segment’s margin will expand on the back of higher volume. Furthermore, operating margin in the Americas segment will improve driven by volume leverage and productivity initiatives. Watts Water expects that its pricing actions should also help to partly mitigate commodity inflation.

However, competitive pressures are likely to adversely impact its position, leading to a potential loss of market share or decrease in prices. The company requires substantial amounts of raw materials, including bronze, brass, cast iron, stainless steel and plastic, almost all of which are purchased from outside sources. The cost of raw materials is subject to change due to interruptions in production by suppliers, changes in exchange rates, imposition of tariffs, and worldwide price and demand levels.

Watts Water’s inability to obtain supplies for its products at favorable costs can have a significant impact on its business or financial health by decreasing its profit margins. Moreover, Watts Water’s Europe segment remains exposed to volatility in its organic sales primarily due to softness in the fluid solutions platform, owing to decline in water, plumbing and heating, ventilation, and air conditioning products.

The commodity markets have experienced tremendous volatility over the years, including the imposition of tariffs, particularly copper and stainless-steel. Also, the successful implementation of the company’s business strategy requires it to continually evolve its existing products and introduce new products to meet customers’ needs.

The company’s products are subject to various regulatory and industry standards. A significant change to statutory requirements, whether federal, foreign, state or local, or to industry standards, can substantially increase its manufacturing costs, impact the size and timing of demand for the products, or put it at a competitive disadvantage.

Watts Water currently has a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader industry are Qualcomm Incorporated (NASDAQ:QCOM) , Ubiquiti Inc. (NASDAQ:UI) and PCTEL, Inc. (NASDAQ:PCTI) . While Qualcomm and Ubiquiti sport a Zacks Rank #1 (Strong Buy), PCTEL carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Qualcomm has long-term earnings growth expectation of 14%.

Ubiquiti has long-term earnings growth expectation of 9.4%.

PCTEL surpassed earnings estimates in each of the trailing four quarters, the average surprise being 150.6%.

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