Analysis: Watts Water Technologies (WTS)

Will Watts Water momentum overcome headwinds?

Water Sector LTP initiated coverage of Watts Water Technologies, Inc. (NYSE:WTS) on 9/10/25 when the stock price closed at $278.47.

On the day of its IPO, 8/21/86, WTS closed at $8.19 and has gained rather steadily over 39 years since, except for a short period of volatility from around October 2021 to late 2022. The stock has returned 18% on an annual basis over the past decade [source: Dividend Yield Theorist].

The upward curve became steep when it climbed from $117.03 on 6/17/22 to $285.86 on 9/18/25. While the S&P 500 grew 15% in the past year, WTS shares have surged 40%.

Company

Based in North Andover, MA (near Boston), WTS designs and manufactures water quality and safety, flow control, and conservation products for use in non-residential (65%) and residential (35%) applications. In addition to water product categories, about 24% of WTS products are in the HVAC and gas categories. The company reports sales in three market segments: Americas 74%, Europe 20%, and APMEA 6%. (APMEA = Asia-Pacific, Middle East, and Africa.)

Developing new products is a key to its competitive strategy. WTS spent $70.4 million on R&D in 2024 (on $2.25 billion revenue), a slight increase from the previous year. The company retains its own product development staff, design teams, and testing laboratories in the Americas, Europe, and APMEA that work to “develop new products and solutions with a focus on sustainability, technological innovation, and smart and connected solutions.”

Quantities

WTS does have momentum going for it. Revenue, net income, adjusted EBITDA margin, earnings per share, current assets, cash, dividends, and stockholders’ equity have all increased each year from 2020 through 2024.

Second quarter 2025 results were stellar: $644 million sales was a record, helped by two acquisitions this year. (WTS completed 14 acquisitions since 2015. On its 12/31/24 balance sheet, it had $715 million of goodwill.)

Today its current ratio is a healthy 2.59. Its debt/equity ratio is 0.10, which is in the top 10% of its industry, according to FinanceCharts.com.

If you care only about momentum, WTS is a slam dunk – buy it today. But we care about several other factors as well, which we’ll explore below. Our objective is to see if there is any compelling reason not to buy this stock.

Headwinds

The first of four concerns is this year’s tariff circus. WTS estimates about $40 million in tariff impacts in 2025, creating margin pressure, said Robert J. Pagano, Jr., CEO and president of WTS, in his second quarter earnings call on 8/12/25. Zacks reports (9/2/25) that to mitigate these effects, “the company is pursuing price increases, global sourcing initiatives and accelerated onshoring. Broader risks remain, including potential tariff changes and a projected global GDP slowdown, which could affect its repair and replacement business, which represents about 60% of total revenues.”

The second concern is possible over-valuation. WTS’s P/E ratio is about 30, compared with the industry average P/E of 18.8, according to Wall Street Zen (9/15/25). The industry specified is U.S. specialty industrial machinery.

The third concern is softening in Europe, which represents about 20% of sales. In Q2 of 2025, sales in Europe decreased 3% YoY on a reported basis and 8% on an organic basis, as a result of declining OEM sales and continued market weakness.

The fourth concern is potential legal liability relating to an EPA Superfund site. Watts Regulator Co., a wholly owned subsidiary of WTS, arranged for the disposal of hazardous substances from a Chemetco copper smelting plant near Hartford, IL. Chemetco went bankrupt, but Watts was still responsible for the disposal and treatment of the contaminants. After the Illinois EPA issued a Notice of Environmental Liability in 2017, Watts has been cleaning up and stabilizing the site but there are unresolved issues relating to hazardous waste shipment and the status of final removal. This matter is addressed in the WTS 2024 annual report (page 90) as follows:

Based on information currently known to it, management believes that Watts Regulator Co.’s share of the costs of the [remediation] is not likely to have a material adverse effect on the financial condition of the Company, or have a material adverse effect on the Company’s operating results for any particular period.

That claim of "no material adverse effect" was undermined by the next sentence on page 90, which avoids any estimate of possible damages -- what's the worst case scenario, for example?

The Company is unable to estimate a range of reasonably possible loss for the above matter in which damages have not been specified….

Recommendation

Despite our discomfort with the slippery way WTS glossed over the Chemetco liability, we do not believe those concerns overwhelm the momentum case for WTS stock. Water Sector LTP issues a BUY recommendation on 9/20/25, when the price per share is $280.94.