Watts Water Technologies, Inc.'s (NYSE:WTS) Share Price Not Quite Adding Up

With a price-to-earnings (or "P/E") ratio of 26.2x Watts Water Technologies, Inc. (NYSE:WTS) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 17x and even P/E's lower than 9x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for Watts Water Technologies as its earnings have risen in spite of the market's earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Watts Water Technologies

Keen to find out how analysts think Watts Water Technologies' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Watts Water Technologies' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Watts Water Technologies' is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a decent 4.5% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 133% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 8.7% per year during the coming three years according to the nine analysts following the company. That's shaping up to be similar to the 10% each year growth forecast for the broader market.

With this information, we find it interesting that Watts Water Technologies is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Bottom Line On Watts Water Technologies' P/E

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Watts Water Technologies' analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Having said that, be aware Watts Water Technologies is showing 1 warning sign in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Watts Water Technologies. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.