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Waters Earnings: Weakness in China Cuts Into Results and 2023 Outlook, but Early Rebound Signs Seen

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Waters Corp
(WAT)

Wide-moat Waters WAT reported weak second-quarter results, as biopharmaceutical clients in China reined in spending on its tools, causing management to push down its sales and adjusted EPS guidance for 2023. However, at first glance, this further reset of 2023 expectations does not materially affect our $323 fair value estimate, and Waters management highlighted some early signs of a rebound to which shares are reacting positively.

In the quarter, Waters reported constant-currency revenue growth of 3% (in line with previous expectations), even when including a high-teens decline in China sales. Other geographies looked much healthier than China, though, with both the U.S. and Europe growing in the high-single digits year over year in constant currency. That rebound in non-China markets, including early-stage biotech firms, and momentum in Waters’ new technology platforms may be contributing to the stock’s increase. Also, easily delayed instrument sales remained the culprit for weakness in the quarter, declining 2% year over year (although up 8% excluding China), while recurring revenue grew 7% in constant currency. Instrument sales could rebound as sentiment improves in key biopharmaceutical markets, especially as strength in Waters’ new product launches continue. Adjusted EPS increased 2% to $2.80 in the quarter, above management’s previous expectations for $2.52-$2.62.

Near-term uncertainty surrounds Waters end markets, though, especially in China, and caused Waters to reduce its 2023 expectations. Specifically, the company now expects 0.5%-1.5 % constant currency sales growth (down from 3%-5% previously) and adjusted EPS of $12.20-$12.30 (down from $12.55-$12.75 previously). While we have tinkered with our near-term expectations after this announcement, our long-term views for Waters and the life science industry remain intact, and our fair value estimate has not changed materially. Waters’ shares still appear mildly undervalued, currently.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Julie Utterback

Senior Equity Analyst
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Julie Utterback is a senior equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. Within the healthcare industry, she covers medical technology and service companies. She is also the chairperson of the equity research team’s capital allocation methodology.

Utterback joined Morningstar in 2005 as an equity analyst in the healthcare industry. At that time, she covered medical technology companies, including orthopedic device, medical equipment, and cardiac device firms. In 2010, she joined Morningstar's credit research team, initiating coverage of the entire healthcare industry and generally helping the organization expand and maintain its credit coverage across many industries. She held that senior credit analyst role until April 2019, when she returned to the equity team to cover medical technology and service companies.

Prior to joining Morningstar, Utterback was an equity analyst at State Farm Insurance for several years. She holds a bachelor's degree in finance from the University of Illinois Urbana-Champaign. She also holds the Chartered Financial Analyst® designation.

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