It has been about a month since the last earnings report for Watts Water (WTS Quick QuoteWTS - Free Report) . Shares have lost about 4.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Watts Water due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Watts Water Q1 Earnings Beat Estimates, Revenues Up Y/Y

Watts Water reported first-quarter 2023 adjusted earnings of $1.92 per share, which increased 18% on a year-over-year basis and beat the Zacks Consensus Estimate by 17.8%.

The company’s quarterly net sales rose 2% year over year to $471.7 million. The top line missed the Zacks Consensus Estimate by 0.6%. Organic sales increased 4% year over year.

The company’s performance benefited from higher revenue growth in Asia-Pacific, the Middle East and Africa (APMEA) and the Americas amid rising inflation. However, unfavorable forex translations affected sales by $9 million.

Segment Results

Americas: Net sales increased 3% year over year to $323 million. Organic sales also rose 3% on higher pricing across all major product lines. Adjusted operating income was up 400 basis points (bps) year over year to 22.5%, driven by increased price and productivity initiatives, partly offset by inflation and higher investments.

Europe: Net sales were down 1% year over year to $128 million, including an unfavorable foreign exchange impact of 5%. Organic sales were up 4%, with growth witnessed across plumbing and heating, ventilation and air conditioning products, offset partly by weakness in drains products. Adjusted operating income was down by 250 bps year over year to 14.6%, owing to inflationary impact and reduced volume.

APMEA: Net sales increased 4% to $20 million. Organic sales moved up 11% from China, the Middle East and Australia. The unfavorable foreign exchange impact was 7%. Adjusted operating margin was up 490 bps to 19.7%, owing to increased trade and affiliate sales volume, along with increased price and productivity.

Other Details

Gross profit increased 10% year over year to $218.1 million. Selling, general and administrative expenses increased 6% year over year to $133.7 million. Operating income was $84.7 million, up 18%.

GAAP operating margin was up 260 bps to 18%. The adjusted operating margin was 17.9%, up 220 bps.

Cash Flow & Liquidity

For the year that ended Mar 26, 2023, Watts Water generated $33.4 million of cash from operating activities compared with $2 million used in the previous year.

The free cash flow was $28.3 million compared with the free cash outflow of $7.6 million in the previous year’s quarter. The increase was due to higher net income and reduced working capital investment.

The company repurchased 22,000 shares for $3.7 million in the first quarter.

As of Mar 26, 2023, the company had $311.8 million in cash and cash equivalents with $147.8 million of long-term debt compared with the respective figures of $310.8 million and $147.6 million as of Dec 31, 2022.

Guidance

For second-quarter 2023, the company expects organic sales to decrease 4% to remain flat. The adjusted operating margin is estimated to rise between 17.2% and 17.8%, with the adjusted margin to be down between 130 bps and 70 bps. The company expects the free cash flow performance to be weak due to seasonality.

The company’s performance in the second quarter is likely to benefit from the acquisition of Enware, an Australian-based supplier of specialty plumbing and safety equipment.

For 2023, Watts Water expects organic sales to be down 5% to increase 2%. The adjusted operating margin is now estimated to be between 15.7% and 16.3%, with the adjusted margin to be down between 10 bps and 70 bps.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review.

VGM Scores

At this time, Watts Water has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Watts Water has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

Performance of an Industry Player

Watts Water belongs to the Zacks Instruments - Control industry. Another stock from the same industry, Sensata (ST Quick QuoteST - Free Report) , has gained 2.6% over the past month. More than a month has passed since the company reported results for the quarter ended March 2023.

Sensata reported revenues of $998.18 million in the last reported quarter, representing a year-over-year change of +2.3%. EPS of $0.92 for the same period compares with $0.78 a year ago.

Sensata is expected to post earnings of $0.95 per share for the current quarter, representing a year-over-year change of +14.5%. Over the last 30 days, the Zacks Consensus Estimate remained unchanged.

The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for Sensata. Also, the stock has a VGM Score of B.