Waters (WAT) Up 4.9% Since Last Earnings Report: Can This Continue?

A month has passed since the last report on the results of Waters (WAT). Shares have risen about 4.9% in that time, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Waters headed for a decline? 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 better understand the important catalysts.

Waters’ earnings beat third-quarter estimates, revenues increased YoY

Waters reported third-quarter 2018 non-GAAP earnings of $1.92 per share, beating the Zacks Consensus Estimate by 2 cents. This number increased by 8.5% year-on-year, but decreased sequentially by 1.5%.

Net sales also declined 3.1% but increased 2.2% year-over-year to $578.02 million. However, this figure missed the Zacks Consensus Estimate of $588.1 million.

The slow improvement in revenue growth year-on-year can be attributed to unfavorable currency fluctuations. Moreover, the company did not record good results on the pharmaceutical and industrial markets.

Nevertheless, strong year-on-year improvement in the government and academic markets drove results. Moreover, the company’s solid momentum in Asia contributed to earnings.

It is worth noting that the company remains optimistic about strengthening its development initiatives, which will probably help it gain the trust of investors in the near and long term.

Top line in detail

Waters’ net sales can be broken down in four ways:

By operating segment: The company operates in two organized segments – Waters and TA.

The Waters segment (89.2% of net sales) generated sales of $515.8 million, an increase of 2.3% compared to the same quarter last year. Sales in the TA segment amounted to USD 62.2 million and represented 10.8% of net sales. This figure reflected just 1% year-over-year growth.

By products and services: This division consists of three segments – Instruments, Services and Chemicals.

Instrument sales (48.9% of sales) amounted to USD 282.5 million, down 0.1% year over year.

Sales of services (34.5% of sales) amounted to USD 199.5 million. This number increased by 5% year-on-year.

Chemicals sales (16.6% of sales) amounted to USD 95.9 million, an increase of 3.3% compared to the same quarter last year.

Moreover, the services and chemicals sections generated total recurring revenues of USD 295.5 million, an increase of 4.4% compared to the same quarter last year.

By markets: The company serves three end markets – pharmaceutical, industrial, and government and academic.

The pharmaceutical market (56.3% of net sales) generated sales of USD 325.2 million, an increase of 1% year-on-year.

Industrial sales (29.7% of sales) amounted to $171.9 million, an increase of 2.1% compared to the same quarter last year.

Universities and government (14% of sales) generated $80.9 million in sales. On a year-over-year basis, this number increased by 7.6%.

By geography: The company’s operating regions include Asia, the Americas and Europe.

Asia (38.4% of net sales) generated sales of $222.2 million for the company. Year-on-year, this number increased by 6.1%.

Americas (35.8% of sales) generated sales of $206.8 million, up 2% year over year.

Europe (25.8% of sales) generated sales of $149.02 million, down 2.7% compared to the same quarter last year.

Operational details

For the reported quarter, non-GAAP selling and administrative expenses were $126.3 million, reflecting a decline of 1.9% year over year and 6.7% from the prior quarter.

Moreover, R&D spending was $35.2 million, up 4.1% year-over-year but down 1.2% sequentially.

Adjusted operating margin was 30.3%, up 100 basis points (bps) from the year-ago quarter, but then declined 20 basis points.

Balance sheet and cash flow

As of September 29, 2018, cash, cash equivalents and investments were $2.08 billion, down from $2.24 billion as of June 30, 2018.

Moreover, total liabilities were $2.17 billion, down slightly from $2.18 billion in the prior quarter.

Waters also generated free cash flow of $135.6 million in the third quarter.

Conductivity

For the fourth quarter of 2018, Waters expects non-GAAP earnings in the range of $2.55 to $2.65 per share.

The company expects net sales growth in the range of 3% to 4% on a constant currency basis.

For 2018, Waters revised its non-GAAP earnings guidance downwards, which is now expected to be in the range of $8-$8.10 per share, down from the previously established range of $8.05-$8.20 per share.

Additionally, the company expects net sales to reflect growth of 3-4% on a constant currency basis.

How have estimates changed since then?

Last month, investors saw a downward trend in new estimates.

VGM results

At this point, Waters’ average growth rating is a C, but its momentum rating is slightly better with a B. However, the stock is rated D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has a Total VGM Score of D. If you’re not focused on one strategy, this score should interest you.

Perspectives

Estimates for this company are generally on a downward trend, and the magnitude of these revisions indicates a downward shift. Notably, Waters carries a Zacks Rank #3 (Hold). We expect a linear rate of return on the stock over the next few months.

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