Watts Water Technologies (WTS) recently reported disappointing fourth quarter results in which sales and earnings both came in below the Zacks Consensus Estimates. This prompted a flurry of negative estimate revisions from analysts and sent the stock to a Zacks Rank of 5 (Strong Sell).
Although shares sold off a bit following the Q4 report, the stock does not look cheap at more than 20x forward earnings.
Watts Water Technologies manufactures products to control the efficiency, safety, and quality of water within residential, commercial, and institutional applications. Its main product lines include residential and commercial flow control products, HVAC and gas products, drains and water re-use products, and water quality products.
Fourth Quarter Results
Watts Water Technologies reported disappointing fourth quarter results on February 17. Adjusted earnings per share came in at $0.58, missing the Zacks Consensus Estimate of $0.65. It was a 2% increase over the same quarter last year.
Sales were essentially flat year-over-year at $376.5 million, which also missed the consensus of $379.0 million. Strength in the Americas and Asia-Pacific was offset by declines in Europe, Middle East and Africa (EMEA). Foreign currency effects were a headwind in the quarter as well.
Meanwhile, the adjusted operating margin decreased by 0.2 percentage points to 9.6% of sales.
Estimates Falling
Following the Q4 miss by Watts Water Technologies, analysts revised their estimates significantly lower for both 2015 and 2016. This sent the stock to a Zacks Rank of 5 (Strong Sell). This puts it in the bottom 5% of all stocks that Zacks ranks based on earnings momentum.
The 2015 Zacks Consensus Estimate fell from $3.06 before the report to $2.55. The 2016 consensus declined from $3.58 to $2.96 over the same period.
Premium Valuation
Shares of Watts Water Technologies sold off after the Q4 report, but it still doesn’t like a value here. Shares trade at 21x 12-month forward earnings, a premium to its 10-year median of 16x and the industry median of 20x. And its enterprise value to cash flow ratio of 23 is also well above its historical median of 14 and the industry multiple of 19.
The Bottom Line
With falling earnings estimates and premium valuation, investors should consider avoiding Watts Water Technologies at least until its earnings momentum improves.
Todd Bunton, CFA is a Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor and Surprise Trader services.
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