BlackJack3D
BlackJack3D
Shares of Waters Corporation (NYSE:WAT) have seen very strong momentum as of recent. In fact, when I looked at the shares as recently as November, Waters was just a $250 stock, as the same shares are now trading about a hundred dollar per share higher!
That move is very substantial in a rather modest period of time, but more so it comes as the business itself has not seen much news, with quarterly results in line with (lower) expectations. This means that the risk-reward has deteriorated greatly in my perspective, meaning that I have taken profits after a great run seen already.
Waters serves regulated markets which have large unmet needs, catering clients in pharma, clinical, food & environment and materials with its high-quality and precise solutions. The company provides liquid chromatography, mass spectrometry services and thermal analysis innovation, as well as related informatics, consumables and services solutions. Many of these service focus on efficiency, safety and quality of operations, products, or processes.
The integrated business model creates quite a recurring revenue business model. These are high-value services, as Waters posts gross margins near 60% on a $3 billion revenue base, while operating margins come in around 30% of sales. The company is quite diversified, with pharmaceuticals clients making up just over half of sales. This is complemented by 30% exposure to industrial clients and a smaller exposure to academic & governmental clients.
Waters Corporation has a solid diversification across geographic areas, as the revenue diversification between products and services is sound as well. Nearly half of sales are generated from instruments, nearly a fifth by consumables, and about a third from services.
Despite its solid positioning, the company has seen some tougher times as of recent amidst lack of execution and slowdown in China hurting reported sales growth.
For 2022, Waters posted a 7% increase in sales to $2.97 billion, with net earnings of $708 million working down to $11.80 per share. A $320 stock at the time traded at 7 times sales and 27 times earnings, both steep multiples.
For 2023, the company guided for a 5.0-6.5% increase in sales, with adjusted earnings per share seen up to $12.65 per share. The thesis, furthermore, changed a bit as Waters announced a $1.36 billion deal to acquire Wyatt Technology a year ago, a deal set to boost pro forma sales by $110 million, yet it would increase net debt towards $2.5 billion as well.
During last year, it became evident that Waters could not maintain the guidance, as it saw full-year sales between flat and minus 1%, as updated alongside the third quarter results. Furthermore, the $11.70 earnings per share outlook was down a dollar from the initial outlook. While this lack of performance was disappointing, I believed that a 22 times earnings multiple looked fair, even as growth essentially came to a standstill, due to softness in China and de-stocking across many sectors at large.
Nonetheless, I was willing to hold on to a modest position, hoping for a rebound in the operating performance in 2024. At the same time, I believed that the prospects for such a rebound were limited as the company announced a 5% cut in the workforce.
In February, Waters reported a 0.5% decline in full-year sales, with fourth quarter sales down more than 4.5% to $819 million and change. Organic revenue declines came in at minus 8%, with the discrepancy being attributed to the Wyatt transaction.
Adjusted earnings were eventually reported at $11.75 per share as the reconciliation to a GAAP profit of $10.84 per share looks quite clean, while net debt ticked down to $1.96 billion, a comforting trend. The 2024 outlook calls for organic constant currency sales to increase by 0.5%, plus or minus a percent. After a tougher 2023, this outlook is not too inspiring, with full year reported sales seen between flat and plus 2%. Adjusted earnings are seen flattish at $11.90 per share, plus or minus fifteen cents.
The only positive, which sounds a bit strange, is that first quarter organic sales are seen down around 10%, which suggests that growth is expected to pick up and become meaningfully positive in the second half of 2024.
Since November, shares have risen more than 40% to $355 per share to this point in time, a huge run in just 4 months' time, and certainly in consideration of the lack of corporate news and the fair results for 2023. This is even more the case, as I am not convinced about the outlook for 2024.
With shares now trading at a roughly 30 times forward earnings multiple, I am not convinced that the risk-reward for Waters Corporation here still is as good as was the case in the fall. Subsequently, I have taken profits here given the dramatic share price performance in light of lack of operating momentum.