On Monday, Deutsche Bank (ETR:DBKGn) initiated coverage on Watts Water Technologies Inc (NYSE:NYSE:WTS), assigning a Hold rating to the company's shares with a price target of $240. The new price target suggests an anticipated total return of 11% from the current price of $218.67, which is trading near its 52-week high of $222.70.
The firm recognized the stock's historical underperformance relative to its sector, which exceeded 20 percentage points in 2024, but also noted the stock's current valuation as one of the most attractive in recent years. According to InvestingPro analysis, the stock is currently trading at fair value, with a P/E ratio of 26.24.
According to Deutsche Bank, the consensus estimates for Watts Water going into 2025 appear slightly conservative. The firm acknowledges the potential for a construction recovery to be a major factor in driving significant revisions to earnings per share (EPS) forecasts. However, the analysts expressed reservations about confidently predicting a robust recovery in the construction sector by 2025.
It's worth noting that Watts Water maintains strong financial health, earning a "GREAT" rating on InvestingPro's comprehensive assessment, with impressive revenue growth of 12.36% in the last twelve months.
The investment bank also pointed out that while Watts Water's valuation multiples seem undemanding, there are limited apparent catalysts that could lead to a re-evaluation of the stock. The company's exposure to the European market, which accounts for approximately 20% of its business, could continue to pose challenges in the near to medium term.
Despite these concerns, Deutsche Bank commented positively on Watts Water's strategic move towards Smart & Connected products. The firm anticipates that it may take some time for this segment to achieve significant scale. Additionally, the company's roughly 2% exposure to the rapidly expanding data center sector is an area that Deutsche Bank suggests investors should watch closely.
In summary, while the bank sees the stock's valuation as attractive and acknowledges positive aspects of the company's strategy, uncertainties in the construction market and lack of clear catalysts for a stock re-rating contribute to the decision to maintain a Hold rating for Watts Water Technologies Inc.
In other recent news, Watts Water Technologies posted mixed results in its third-quarter earnings. Despite a 4% decrease in organic sales, the company maintained a strong adjusted operating margin of 17.1% and reported a robust year-to-date free cash flow of $204 million. Seaport Global Securities maintained its Neutral rating on the company, acknowledging the positive quarterly results but also noting a projected 1-2% decline in organic sales for 2024.
The firm adjusted its earnings per share (EPS) estimates for Watts Water Technologies, raising the 2024 EPS forecast to $8.75 and the 2025 estimate to $9.01. However, the fourth-quarter EPS estimate for 2024 was reduced due to a weaker sales outlook, particularly in Europe. Other recent developments at the company include the potential closure of a manufacturing plant in France, the announcement of CFO Shashank Patel's retirement in 2025, and the launch of Nexa, a SaaS water management solution.
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