Focusing On Biologics And PFAS Testing Will Improve Future Prospects

Key Takeaways

• Strategic focus on high-growth areas like biologics and PFAS testing positions Waters for increased revenue and market share expansion.
  
• Operational improvements enhance margins, while macroeconomic recovery and deferred replacements boost sales and earnings growth.
  
• Reliance on China and competitive pressures, alongside pharma growth uncertainties, create challenges for Waters' revenue growth and net margins.

Catalysts

Provides analytical workflow solutions in Asia, the Americas, and Europe.

• Waters Corporation is experiencing an increase in customer CapEx spending, particularly among large pharma clients, which is leading to a notable uplift in the speed of adoption of new technologies such as the Alliance iS system. This suggests potential future growth in instrument sales as the replacement cycle kicks in, positively impacting revenue.
  
• The company is strategically aligning its innovation efforts with high-growth testing areas, such as large molecule biologics and PFAS testing, which are expected to augment future growth. This focus could drive increases in revenue and market share.
  
• Waters has observed strong adoption of new products like the Xevo TQ Absolute mass spectrometer, driven by applications in PFAS testing and pharma quantitative applications. This success indicates potential for future sales growth in high-demand market segments, influencing revenue and earnings positively.
  
• The company is making operational improvements that have led to better-than-expected gross margin and operating margin performance. Continued focus on operational excellence, pricing, and productivity is expected to sustain margin expansion over the long term, improving net margins.
  
• Waters is well-positioned to benefit from an anticipated catch-up in deferred instrument replacements as macroeconomic conditions improve. This potential market recovery represents a catalyst for increased sales and revenue growth, with implications for earnings expansion.

Waters Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Waters's revenue will grow by 5.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.4% today to 24.0% in 3 years time.
• Analysts expect earnings to reach $819.9 million (and earnings per share of $14.39) by about January 2028, up from $622.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.6x on those 2028 earnings, down from 36.0x today. This future PE is lower than the current PE for the US Life Sciences industry at 43.9x.
• Analysts expect the number of shares outstanding to decline by 1.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.48%, as per the Simply Wall St company report.

Waters Future Earnings Per Share Growth

Risks

• Continued reliance on China could present challenges, particularly with the variability in China's stimulus effects and its medium-term economic growth, potentially impacting future revenue growth projections.
  
• Competitive pressures, especially as Waters launches new innovations and products, might compress pricing power or market share gains, affecting net margins.
  
• While there is optimism around pharma growth drivers such as GLP-1 and PFAS testing, these are contingent on continuous pharma spending and the pace at which drug development progresses, which can affect revenue predictions.
  
• Waters' guidance reflects ongoing uncertainty, particularly regarding economic conditions and customer funding dynamics, which can impact longer-term revenue and earnings stability.
  
• The instrument replacement cycle's pace of recovery is uncertain; although there are early signals of improvement, any delays could affect medium-term revenue growth forecasts.

Valuation

• The analysts have a consensus price target of $382.96 for Waters based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $430.0, and the most bearish reporting a price target of just $340.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.4 billion, earnings will come to $819.9 million, and it would be trading on a PE ratio of 31.6x, assuming you use a discount rate of 6.5%.
• Given the current share price of $377.03, the analyst's price target of $382.96 is 1.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.