In This Article:
Since May 2020, the S&P 500 has delivered a total return of 106%. But one standout stock has more than doubled the market - over the past five years, Watts Water Technologies has surged 231% to $243.38 per share. Its momentum hasn’t stopped as it’s also gained 14.8% in the last six months thanks to its solid quarterly results, beating the S&P by 15.8%.
Is now still a good time to buy WTS? Or is this a case of a company fueled by heightened investor enthusiasm? Find out in our full research report, it’s free.
Why Does Watts Water Technologies Spark Debate?
Founded in 1874, Watts Water (NYSE:WTS) specializes in manufacturing water products and systems for residential, commercial, and industrial applications globally.
Two Things to Like:
1. Elite Gross Margin Powers Best-In-Class Business Model
All else equal, we prefer higher gross margins because they usually indicate that a company sells more differentiated products and commands stronger pricing power.
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.
2. Outstanding Long-Term EPS Growth
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
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.
One Reason to be Careful:
Core Business Falling Behind as Demand Plateaus
We can better understand Water Infrastructure companies by analyzing their organic revenue. This metric gives visibility into Watts Water Technologies’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Watts Water Technologies failed to grow its organic revenue. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Watts Water Technologies might have to lean into acquisitions to accelerate growth, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus).