On Nov 21, we issued an updated research report on Milford, MA-based Waters Corporation (WAT - Free Report) , an analytical instrument manufacturer which specializes in innovating practical and sustainable products for laboratory-dependent organizations. The company currently carries a Zacks Rank #3 (Hold).
Last month, Waters Corp. reported in-line earnings in the third quarter of 2016. However, the company fared much better with respect to year-over-year comparisons, reflecting growth of 10.6% from the prior-year quarter tally.Continued top-line growth and disciplined expense management proved conducive to the bottom-line performance. Also, improved operational execution, backed by the company’s efficient business model, supplemented earnings growth.
However, the company’s top line missed the Zacks Consensus Estimate. Post the earnings report, the Zacks Consensus Estimate trended south over the last 30 days, falling 0.3% to $6.55 for 2016 and 0.4% to $7.13 for 2017.
The company’s key growth drivers remain strong momentum across pharmaceutical end-markets, along with striking growth in recurring-revenue products. During third-quarter 2016, the company’s global pharmaceuticals business sales grew 13% on a year-over-year basis, spread across all significant pharmaceutical workflows and major geographic regions. Particularly, the company is seeing remarkable growth in core small molecule QA/QC workflows, as well as in large molecule R&D oriented applications.
The industrial sector, however, has lagged in recent times, as global weakness in the chemical industry translated into slower growth in both the TA Instruments and Waters product lines. Further, Waters Corp. has been grappling with challenging governmental and academic demand, with pronounced softness in Japan, Europe and the U.S. In the third quarter of 2016, the segment saw a 15% year-over-year decline.
Waters Corp.’s exposure in the pharma/biotech industry is primarily in regulated commercial lab environments, where demand is non-discretionary and not prone to cyclicality. This helps the company mitigate uncertain client spending stemming from macroeconomic volatility. Also, given the fact that liquid chromatography is used in a variety of applications including drug discovery, development, quality control of drug products, therapeutic drug monitoring, proteomics, metabolomics, environmental analysis and food analysis, Waters Corp. stands to benefit significantly from this business going forward.
Waters Corp.’s leading position in the high-performance liquid chromatography and mass spectrometry markets remains a major strength that has driven revenues substantially over the past few quarters. Further, we believe that the company’s recently completed acquisitions will supplement its core businesses.
For instance, Waters Corp.’s TA division has been benefitting significantly from the previous buyouts. The company’s recently acquired ElectroForce Group – which specializes in manufacturing mechanical testing systems based on a proprietary electromagnetic motor technology – will continue to supplement growth. Also, the inclusion of Rapid Evaporative Ionization Mass Spectrometry technology in business bodes well for the company as it will reduce its dependence on pharmaceuticals and higher-end academic research orders.
The company expects the trend to continue and drive 6% sales growth in 2016. Moreover, it has a rich pipeline comprising innovative new products that are slated for launch in the quarters ahead.
Waters Corp.’s liquidity position has been improving, with cash, cash equivalents and investments increasing to around $2.7 billion at the end of third-quarter 2016 from $2.4 billion as on Dec 31, 2015. Also, the company is dedicated toward improving its shareholders’ value through steady dividend payouts and share repurchases.
Yet, Waters Corp. remains vulnerable to stiff competition from several instrument manufacturers. Also, escalating debt levels and R&D costs could put pressure on margins. Further, inconsistent spending in the governmental and academic markets raises concerns.
WATERS CORP Price and Consensus
Stocks to Consider
Some better-ranked stocks in the broader computer & technology sector include Adobe Systems Incorporated (ADBE - Free Report) , Aspen Technology, Inc. (AZPN - Free Report) and Guidance Software, Inc. (GUID - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Adobe Systems is a leading player in the computer software space. The company has a striking earnings surprise history for the trailing four quarters, having beaten estimates all through, for an average of 5.6%.
Aspen Technology deals in process optimization software and services. It boasts a remarkable average surprise of 23.6% in the trailing four quarters, having surpassed estimates strongly in each of them.
Guidance Software, an industry leader in digital investigative solutions, also has an impressive earnings history, having beaten estimates in all four trailing quarters, for an average of 18.6%.
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