Piper Jaffray Lowers FY11 Estimates On WTS; Sees Soft Demand

Following Watts Water Technologies WTS in-line 3Q results, Piper is maintaining its below-consensus 4Q EPS estimate and lowering our FY11 estimates. After besting analyst estimates by a wide margin in 1H10 and providing a cautious near-term outlook. Piper has a Neutral rating and a Price Target of $39 on WTS. On the conference call, management indicated that top-line growth in the near-term will be pressured by DIY channel de-stocking and slower residential market activity, which was the thesis of our downgrade earlier this week. Piper believes the company's refined cost structure is positioned for margin leverage, though sales growth visibility has become clouded and will limit valuation expansion in its view. Adjusted EPS of $0.52 beat our estimate by a penny, though the upside to our model came from a lower tax rate. Sales of $315 million fell modestly shy of consensus. Sales growth in North America outpaced Europe, but in general results matched Piper's expectations. A weaker gross margin was offset by tight expense control. WTS closed Tuesday at $35.61