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Why Is Waters (WAT) Down 5.6% Since Last Earnings Report?

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It has been about a month since the last earnings report for Waters (WAT - Free Report) . Shares have lost about 5.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Waters due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Waters' Q1 Earnings & Revenues Miss Estimates

Waters reported first-quarter 2023 non-GAAP earnings of $2.49 per share, missing the Zacks Consensus Estimate by 4.2%. Further, the bottom line decreased 11.1% on a year-over-year basis. The figure includes an 8% unfavorable foreign exchange headwind.

Net sales of $684.7 million lagged the Zacks Consensus Estimate of $695.5 million. The figure declined 1% on a reported basis while surging 3% on a constant-currency basis from the comparable year-ago quarter’s readings.

Softness in the pharmaceutical market, a slowdown in Instruments sales and weakening momentum across the Americas and Europe were concerns.

Top Line in Detail

Waters’ net sales figure can be categorized in four ways:

By Operating Segment: WAT operates under two organized segments, namely Waters and TA.

The Waters segment (88% of net sales) generated sales worth $602.1 million, down 2% from the year-ago quarter’s level. Sales in the TA segment were $82.6 million (12% of net sales), reflecting 7% year-over-year growth.

By Products & Services: The division comprises three segments, namely Instruments, Services and Chemistry.

Instruments sales (44% of sales) were $302.9 million, falling 7% on a year-over-year basis.

Service sales (36% of sales) were $248.2 million, increasing 4% year over year.

Chemistry sales (20% of sales) were $133.5 million, growing 6% from the year-ago quarter’s level.

Moreover, the service and chemistry segments jointly generated recurring revenues of $381.7 million, increasing 4% from the year-ago quarter’s reported figure.

By Markets: Waters serves three end markets, such as Pharmaceutical, Industrial and Governmental & Academic.

The Pharmaceutical market (56% of net sales) generated sales of $384.9 million, which decreased 7% on a year-over-year basis.

The Industrial market’s (31% of sales) sales were $209.7 million, up 0.1% from the year-ago quarter’s level.

Academic & Government (13% of sales) generated $90.1 million of the total sales. The figure increased 38% year over year.

By Geography: Waters’ operating regions include Asia, the Americas and Europe.

Asia (37% of net sales) generated $253.1 million in sales, down 0.5% on a year-over-year basis. Sales in China fell 4% from the prior-year quarter’s level.

The Americas (36% of net sales) generated $246.4 million in sales, decreasing 1% year over year. Sales in the United States decreased 3% year over year.

Europe (27% of net sales) generated $185.2 million in sales, down 1% from the prior-year quarter’s level.

Operating Details

In the first quarter, non-GAAP selling and administrative expenses were $174.02 million, up 12.2% from the year-ago quarter’s level. As a percentage of net sales, the figure expanded by 290 basis points (bps) on a year-over-year basis.

Research and development spending was $42.7 million, up 5.5% from the year-ago period’s reported figure. As a percentage of net sales, the figure expanded by 30 bps year over year.

The adjusted operating margin was 26.8%, which contracted by 350 bps year over year.

Balance Sheet & Cash Flow

As of Apr 1, 2022, cash, cash equivalents and investments were $486.9 million, up from $481.4 million as of Dec 31, 2022.

Accounts receivables stood at $683.3 million at the end of the first quarter, down from $722.9 million in the last reported quarter.

Waters generated cash from operations of $196.7 million in the reported quarter, down from $198.7 million in the prior quarter.

WAT recorded a free cash flow of $166.4 million in the first quarter.

Guidance

For second-quarter 2023, Waters expects non-GAAP earnings of $2.52-$2.62 per share, which includes a foreign exchange headwind of 3%.

Waters anticipates net sales growth of 1-3% on a constant-currency basis. WAT expects sales growth to decline 1% due to unfavorable foreign exchange fluctuations.

For 2023, Waters anticipates non-GAAP earnings in the band of $12.55-$12.75 per share. This includes a foreign exchange headwind of 1%.

Waters expects 2023 net sales growth of 3-5% on a constant-currency basis.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

The consensus estimate has shifted -9.47% due to these changes.

VGM Scores

At this time, Waters has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Waters has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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