Since October 2024, Watts Water Technologies has been in a holding pattern, posting a small return of 3.6% while floating around $207.70. However, the stock is beating the S&P 500’s 6.9% decline during that period.
Is WTS a buy right now? Or is this an overvalued company? Find out in our full research report, it’s free.
Why Does WTS Stock 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
Gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.
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 44.7% gross margin over the last five years. Said differently, roughly $44.66 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue. 
2. Operating Margin Rising, Profits Up
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Looking at the trend in its profitability, Watts Water Technologies’s operating margin rose by 5.3 percentage points over the last five years, as its sales growth gave it operating leverage. Its operating margin for the trailing 12 months was 17.3%.
One Reason to be Careful:
Core Business Falling Behind as Demand Plateaus
In addition to reported revenue, organic revenue is a useful data point for analyzing Water Infrastructure companies. 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). 
Final Judgment
Watts Water Technologies’s merits more than compensate for its flaws, and with its recent outperformance amid a softer market environment, the stock trades at 22.8× forward price-to-earnings (or $207.70 per share). Is now a good time to initiate a position? See for yourself in our comprehensive research report, it’s free.
Stocks We Like Even More Than Watts Water Technologies
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