Waters Corporation Stock: Thesis Unchanged (NYSE:WAT)

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One of the more technologically advanced companies that I have written about over the years has been Waters Corporation (NYSE:WAT). This enterprise focuses on a variety of activities, the main ones involving services around high-performance and ultra-performance liquid chromatography technologies aimed at identifying unknown components within samples, as well as thermal analysis and other similar activities. The company’s most recent financial performance has been rather interesting. Sales continue to rise even as profitability takes a slight step back. Overall, however, the future for the business looks bright. But this does not mean that it makes sense for investors to buy into at this moment. The fact of the matter is that, in addition to looking lofty on an absolute basis, the company’s shares also look more or less fairly valued compared to similar businesses. On the whole, I would make the case that the company is a solid ‘hold’ prospect that will likely generate returns that more or less match the broader market for the foreseeable future.

Mixed performance

On June 1st of this year, I wrote an article discussing whether it yet made sense to buy into shares of Waters Corporation. From January of this year through that time, shares of the business had taken something of a beating, though not as much as the broader market did. This meant that, up to that point, the company had previously matched my expectations of following the market. But given the drop in share price, I felt that, at that time, it warranted a second look. In that article, I acknowledged that the company’s financial performance had been rather attractive. I also said that the company would likely fare well in the long run. But at that time, I still couldn’t get my mind past the lofty price that shares were going for. I ended up retaining my ‘hold’ rating on the company. Since then, shares have underperformed the market slightly. While the S&P 500 is up by 5%, shares in Waters Corporation have risen a more modest 2.3%.

Waters Corporation Historical Financials

Author – SEC EDGAR Data

This performance disparity comes at a time when the fundamental performance of the company is somewhat mixed. To see what I mean, we need only look at the second quarter of its 2022 fiscal year. This is the only quarter for which new data is available compared to when I last wrote about it. During that quarter, sales came in quite strong, hitting $714.3 million. That represented an increase of 4.8% over the $681.6 million generated just one year earlier. Growth was particularly strong along the product lines, with sales climbing by 7% year over year. That compared to the 2% increase associated with service sales. This increase came despite the fact that foreign currency translation hit the company in the second quarter to the tune of 5%. Without it, sales would have been much stronger.

Profitability for the company, on the other hand, did take something of a beating. Net income fell from $167.3 million in the second quarter of 2021 to $164.9 million the same time this year. The primary culprit here appears to have been a 10% increase in the company’s cost of sales. This, in turn, was driven at least partially by higher electronic component costs and freight inflationary pressures. This impacted other areas of profitability for the firm. Operating cash flow, for instance, fell from $143 million to just $56.9 million. It is worth mentioning, however, that management chalked this pain up to a delay in the timing of shipments in the second quarter of the year that resulted in a delay of the receipt of materials and components from a supplier that was impacted by the COVID-19 pandemic lockdowns in China. Inventory level increases were also a component here because of the higher sales volume and related supply chain problems. If we adjust for changes in working capital, the picture would have been slightly better, with cash flow falling from 200 to $11.3 million to $190.7 million. Meanwhile, EBITDA for the company actually increased, rising from $229.9 million to $234 million.

Waters Corporation 2Q 2022 Financials

Author – SEC EDGAR Data

Naturally, as the chart above illustrates, these pressures did impact some of the company’s total performance figures for the first half of the year as a whole. However, sales are still up, with revenue having risen from $1.29 billion to $1.41 billion. Net income is still up, as is adjusted operating cash flow and EBITDA. Only traditional operating cash flow is down, having fallen from $361.4 million to $254.9 million. When it comes to the 2022 fiscal year as a whole, management does have some positive expectations for the company. They currently see revenue rising by between 4.5% and 5.5%. This increase would be even greater at between 9.5% and 10.5% had it not been for foreign currency translation. Earnings per share should be around the $11.71 to $11.81 range, with adjusted earnings at between $11.95 and $12.05. Using these midpoint figures, this translates to net income of $718.5 million. If we assume that other profitability metrics will climb at the same rate, then we should anticipate adjusted operating cash flow of $893.4 million and EBITDA of nearly $1.03 billion.

WAT stock Trading Multiples

Author – SEC EDGAR Data

This makes it fairly simple to value the company. On a forward basis, the firm is trading at a price-to-earnings multiple of 27.6. This is down from the 28.7 reading we get using 2021 results. The price to adjusted operating cash flow multiple should decline from 23.1 to 22.2, while the EV to EBITDA multiples should drop from 21.2 to 20.4. To put this in perspective, I compared the company with the same five firms that I compared to two in my last article about it. On a price-to-earnings basis, four of the companies had positive results, with their multiples ranging between 29 and 97.6. In this case, Waters Corporation was the cheapest of the group. Using the price to operating cash flow approach, the range is between 19.3 and 45.6. And when it comes to the EV to EBITDA approach, the range is between 14 and 37.4. In both cases, three of the five companies are cheaper than our prospect.

Company Price / Earnings Price / Operating Cash Flow EV / EBITDA
Waters Corporation 28.7 23.1 21.2
Bio-Rad Laboratories (BIO) N/A 33.5 21.4
PerkinElmer (PKI) 29.0 19.3 14.0
ICON Public Limited (ICLR) 97.6 20.2 20.1
Bio-Techne Corporation (TECH) 57.0 45.6 37.4
Avantor (AVTR) 31.1 20.6 16.4

Takeaway

At this moment, data suggests to me that Waters Corporation is struggling a slight bit on the bottom line. Some of the company’s problems, to be sure, relate to foreign currency translation. Outside of that, the picture would have been far better. All things considered, however, the situation is far from bad and I maintain my belief that the long-term outlook for the company is positive. Having said that, shares do still look lofty on an absolute basis and are definitely more or less fairly valued compared to similar firms. So for these reasons, I’ve decided to retain my ‘hold’ rating on the enterprise for the moment.

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