Watts Water Technologies, Inc. (WTS) | The Buildout — AI Infrastructure
The Verdict
Watts Water Technologies makes products that manage and conserve the flow of fluids and energy into, through, and out of buildings. In the AI infrastructure buildout, those products connect to data center cooling: valves, strainers, drainage components, and thermal-storage tanks sit in the cooling loop. As liquid cooling adoption increases, Watts sells more content per megawatt than in traditional air-cooled systems.
| Market Cap | — |
| Revenue (TTM) | $2.6B |
| Revenue Growth | +14.2% |
| EBITDA Margin (TTM) | 22.2% |
| Net Cash | $177M |
| Earnings Beats | 7 of 7 |
| P/E (TTM) | — |
| EV/EBITDA (TTM) | — |
What We Like
- About 60% of sales come from repair and replacement, giving a recurring base across construction cycles.
- Data center sales rose from roughly 3% of FY2025 sales to about 8% of H1 2026 sales.
- Management raised the served data center addressable market from an “over $1 billion” public figure to approximately $2 billion, with $25,000 to $100,000 of content per megawatt.
- Full-year 2026 organic growth guidance was raised to +8% to +11%, with adjusted EBITDA and operating margin expansion of +20 to +80 basis points.
- The balance sheet ended Q2 2026 with net debt to capitalization of negative 12%.
What We’re Watching
- Data center order visibility is only about five months at the outer edge, and Q4 is less clear than Q3.
- Q2 2026 included roughly $20 million of disclosed pull-forwards, with Q3 organic growth guided to +5% to +8% versus Q2’s +12% organic growth.
- Free cash flow was just $98 million year-to-date through Q2 2026 versus $105 million a year earlier; the full-year ≥90% conversion target requires a second-half step-up.
- Middle East conflict carries direct exposure of about 2% of global sales, and guidance assumes no change in conflict status.
The thesis is strengthening because data center growth has run ahead of management’s initial goal, the addressable market was raised, and the full-year outlook was lifted after two quarters of evidence. The open question is whether Q4 data center visibility improves enough to show the growth is durable rather than supported by pull-forwards.
Earnings Beat
Watts reported Q2 2026 sales of $763 million, up 19% reported and 12% organic. Adjusted operating margin was 21.0%, down 60 basis points year over year, and adjusted EBITDA margin was 23.1%, down 70 basis points. Data center sales more than tripled compared with the prior year.
| Metric | Q1 FY2026 | Q4 FY2025 | Q1 FY2025 | YoY |
|---|---|---|---|---|
| Revenue | $677M | $625M | $558M | +21.4% |
| Gross margin | 48.1% | 49.5% | 48.8% | -70bps |
| EBITDA | $148M | $130M | $101M | +46.4% |
| EPS | $2.97 | $2.51 | $2.21 | +34.6% |
| Data center sales growth (y/y) | More than tripled | More than doubled | n/a | Accelerated from Q1 |
| Price realization | ~6% | Just shy of 8% | n/a | Declined sequentially |
On the data centers, we do have a little bit of gross margin dilution from that, but it’s actually accretive to operating margin because there’s a very low operating expense burden on that data center business.— Diane McClintock, Chief Financial Officer, August 6, 2026
Management tone: Management shifted from deliberately holding full-year guidance in May despite a Q1 beat to raising it materially in August after Q2. It stayed explicit about pull-forwards, limited data center visibility, and soft residential and non-data-center construction.
Management Guidance
Management raised FY2026 guidance to reported sales growth of +14% to +17% and organic growth of +8% to +11%. Adjusted EBITDA and operating margin expansion are both guided to +20 to +80 basis points, with data center sales expected to be mid- to high single digits as a percentage of overall company sales. The guidance assumes no change in Middle East conflict status and no further tariff-structure changes; potential IEEPA tariff refunds are excluded from adjusted results.
Trajectory
Reported revenue rose from $625 million in Q4 2025 to $677 million in Q1 2026 and $763 million in Q2 2026, driven by price and data center volume. Gross margin stepped down from 50.6% in Q2 2025 to 48.1% in Q1 2026 as acquisitions and mix diluted margins. The data center trajectory accelerated from more than doubling in Q1 to more than tripling in Q2, while pull-forwards and 80/20 actions complicate organic comparisons.
The Model
The model projects FY+1 revenue of $2,755 million and EBITDA of $620 million, a 22.5% EBITDA margin. For FY+2, it projects revenue of $3,015 million and EBITDA of $702 million, a 23.3% margin. Near-term revenue is anchored by the raised FY2026 growth guide and continued data center momentum; FY+2 assumes the cooling product ramp and replacement demand carry the mix shift forward.
| Metric | FY2025 | Next FY (E) | Following FY (E) |
|---|---|---|---|
| Revenue | $2.4B | $2.8B | $3.0B |
| YoY Growth | — | +13.0% | +9.4% |
| EBITDA | $521M | $620M | $702M |
| EBITDA Margin | 21.4% | 22.5% | 23.3% |
Projections are the median of 5 independent model runs. The model’s revenue sits 4.5% above analyst consensus.
Management raised FY2026 guidance to reported sales growth of +14% to +17% and organic growth of +8% to +11%. Adjusted EBITDA and operating margin expansion are both guided to +20 to +80 basis points, with data center sales expected to be mid- to high single digits as a percentage of overall company sales. The guidance assumes no change in Middle East conflict status and no further tariff-structure changes; potential IEEPA tariff refunds are excluded from adjusted results.
What Could Go Right — and Wrong
- Cool Vault repeat orders continue and Superior Boiler plus the Texas site convert capacity.
- Stainless steel liquid-cooling products launch and push content toward the high end of the $25,000 to $100,000 per-megawatt range.
- Europe holds its Q2 organic growth improvement and the full-year segment guide of +1% to +4%.
- H2 free cash flow normalizes enough to deliver full-year conversion of at least 90% of net income.
- Data center sales exceed the mid- to high single-digit full-year mix as liquid cooling adoption expands.
- Data center order pace cools, with only about five months of visibility and no disclosed backlog.
- Pull-forwards unwind and Q4 project timing slips, leaving growth below the raised guide.
- Strategic inventory does not convert by year-end, keeping free cash flow below the ≥90% conversion target.
- The Middle East conflict escalates beyond the direct ~2% exposure and pressures APMEA and Europe.
- Cool Vault ramp stalls or stainless steel liquid-cooling development is delayed.
Looking Ahead
The next twelve months depend on converting data center project demand into revenue, ramping Cool Vault, and completing the 80/20 rationalization through H1 2027. The Q3 2026 guide calls for reported growth of +11% to +14% and organic growth of +5% to +8%, followed by a second-half ramp to meet full-year commitments.
- Early November 2026Q3 2026 earnings call — Tests Q3 actuals against reported +11% to +14% and organic +5% to +8% guidance.
- Q4 2026Data center mix conversion — Tests full-year data center mix of mid- to high single digits.
- H2 2026–1H 202780/20 product rationalization ramp — Tests Americas $25–26M and Europe $6–8M headwinds with margin accretion.
- End-2026France restructuring completion — Tests Europe segment margin expansion of +20 to +80 basis points.
- FY2026 year-endFree cash flow conversion — Tests whether full-year conversion reaches at least 90% of net income.
Financials
Annual Summary
| Metric | FY2024 | FY2025 | TTM | YoY |
|---|---|---|---|---|
| Revenue | $2.3B | $2.4B | $2.6B | +8.3% |
| Gross Margin | 47.1% | 49.4% | 49.2% | +227bps |
| EBITDA | $445M | $521M | $3.2B | +17.2% |
| EBITDA Margin | 19.7% | 21.4% | 22.2% | +162bps |
| Net Income | $291M | $341M | $366M | +17.0% |
| Free Cash Flow | $326M | $356M | $2.1B | — |
| Net Cash | — | — | — | — |
Key Ratios (Trailing)
- P/E TTM—
- EV/EBITDA TTM—
- EV/Revenue TTM—
- Price/FCF TTM—
- Gross Margin (TTM)49.2%
- EBITDA Margin (TTM)22.2%
- Net Margin (TTM)14.3%
- ROIC20.4%
- FCF Conversion55.9%
- SBC / Revenue0.7%
The Company
Watts Water Technologies makes products that manage and conserve the flow of fluids and energy into, through, and out of buildings. Its four product families are residential and commercial flow control and protection, HVAC and gas, drainage and water re-use, and water quality. Roughly 60% of sales are repair and replacement, which management describes as a consistent foundation across cycles.
The company operates through three geographic segments: Americas, Europe, and APMEA. It has owned and leased manufacturing and distribution sites across the Americas, Europe, China, Saudi Arabia, and other markets, and it completed five acquisitions in 2025 including Superior Boiler and Saudi Cast.
Business Segments
Competitive Landscape
Watts competes in a water-technology market where customers could source substitute valves from numerous competitors with minimal disruption. The available disclosures do not name direct competitors or quantify market share.
Supply Chain
Watts sits as a component and product supplier into the data center cooling loop, not a data center operator. These products sell to hyperscalers, contractors, OEMs, and distribution channel partners; specific hyperscaler names are not disclosed.
More on WTS: Earnings recap