Watts Water: The Data Center Pivot Is Real—and It's Moving the Needle

A Record Quarter, Fueled by Cool Water

When Watts Water Technologies reported second-quarter results on August 6, the headline was hard to miss: record sales, record operating income, and record EPS. But the real story is where the growth came from. Organic sales rose 12%—nearly double the company's typical growth rate—and management was clear about the driver: “our data center sales more than tripled compared with the prior year, reflecting continued strong demand for our cooling solutions, including our recently launched Cool Vault thermal storage tanks.” — Robert Pagano, Chief Executive Officer · 2026-08-06 This is a company that, just a year ago, derived only 3% of sales from data centers. Now, through the first half of 2026, that figure is 8%, and the full-year guide is for mid- to high single digits.

The numbers back up the narrative. The liquid cooled trend is not a side bet; it's the core of the company's growth algorithm. CEO Bob Pagano explained in Q&A: “So we've been fine-tuning that analysis really where we increased it from $1 billion to $2 billion. And yes, we added Europe inside of that.” — Robert Pagano, Chief Executive Officer · 2026-08-06 That doubling of the addressable market—from "greater than $1 billion" to roughly $2 billion—is a statement about both the breadth of the opportunity (global, not just North America and China) and the company's confidence in its product roadmap, especially the Cool Vault thermal storage tanks.

So we've been fine-tuning that analysis really where we increased it from $1 billion to $2 billion. And yes, we added Europe inside of that.

Data Centers: From Side Show to Main Event

This isn't the first time data centers have come up on Watts' calls—far from it. But the tone has shifted. In February, Pagano noted that “Asia Pacific was the leader of that several years ago. Now America is taking that, and America is over half of that.” — Robert J. Pagano, Chief Executive Officer · 2026-02-12 In May, he framed it more defensively: “Data centers are offsetting softness, particularly in the residential market.” — Robert J. Pagano, Chief Executive Officer · 2026-05-07 Now, in the most recent call, data centers have become the lead story—a growth engine, not just a hedge.

CFO Diane McClintock quantified the quarter's strength: “Sales increased to $763 million, reflecting a 19% increase on a reported basis and a 12% increase organically, both better than expected.” — Diane McClintock, Chief Financial Officer · 2026-08-06 The company also detailed data center sales pull-forwards—roughly $5 million in the Americas and another $5 million in APMEA—but the trend is unmistakably upward. Management now expects data center sales to represent mid- to high single digits of total sales this year, up from 3% in 2025.

The opportunity is not just about the tanks. Pagano described the content range per megawatt (roughly $25k to $100k) and highlighted that liquid-cooled projects carry more content than air-cooled ones. The Incremental sales from recent acquisitions (Superior Boiler for tanks, Saudi Cast for in-country supply) are being integrated to support this push. The company is investing in capacity at existing sites—and, as Pagano noted, “we did expand our CapEx, and that is directly related to some of the additions we're doing at both our sites in North America as well as inside of China.” — Robert Pagano, Chief Executive Officer · 2026-08-06

Tariffs, Rationalization, and the Margin Math

The data center story is the headline, but the quarter was also a masterclass in managing headwinds. Watts is navigating a fluid tariff environment—Section 301, 338, and 232 tariffs, plus the expiration of Section 122—and the ongoing Middle East conflict. The company is excluding any potential IEEPA tariff refunds from its outlook, calling them nonrecurring. That's prudent, but it also means the margin guidance is built on price realization, volume leverage, and productivity—not one-time windfalls.

The other key lever is the Product rationalization program (the 80/20 initiative). This program is a deliberate sales headwind—about $8 million in Q2, or 1 point of organic growth—but it's designed to improve mix and margins. CFO McClintock said the full-year impact will be roughly $25–26 million in the Americas and $6–8 million in Europe. The trade-off is clear: lower revenue, but higher quality. The company raised its full-year adjusted operating margin expansion target to up 20–80 basis points, and the strong first half gives it confidence.

The fundamentals support the execution story. Watts has a revenue base that has roughly doubled over the past eight years, and the latest quarter (Q1 2026) saw a 21% jump—a pace that even the company's own guidance didn't anticipate. Operating margins have expanded from the mid-teens to ~20% over the same period, and the balance sheet remains underlevered, with net cash. The valuation, at ~0.7x sales and ~3.5x operating income, is not stretched given the growth trajectory.

The Bigger Picture

Watts is riding a global theme—data center cooling—that is showing up across the earnings tape. Other reporters this week mentioned data centers, liquid cooling, and power density. But Watts' specific angle is the liquid cooling content per megawatt, which is rising as adoption accelerates. The company's pivot is not just a revenue story; it's also a margin story because the data center business carries a very low operating expense burden, as McClintock noted: "it's actually accretive to operating margin."

The stock has responded accordingly. WTS has rallied more than 24% over the past 90 days and sits within 4% of its all-time high, set in early August. That's a market voting with conviction. The risk, of course, is lumpiness—data center projects can shift quarters, and the company already saw pull-forwards in Q2. But with a doubled TAM, a new product hitting the market, and management raising guidance, the market is betting that this is a durable structural shift, not a one-quarter burst.