Revitalized Portfolio And High-Growth Segments Will Drive Future Success In Analytical Instruments

Key Takeaways

• Waters is revitalizing its product portfolio, driving revenue growth through innovation and tapping into high-growth markets like GLP-1, PFAS testing, and generics in India.
  
• Improved financial positioning allows Waters to consider strategic M&A or share repurchases, enhancing earnings per share and shareholder value.
  
• Foreign exchange challenges and macroeconomic uncertainties could hinder earnings growth, while volatile customer spending and strategic risks may further impact revenue and margin expansion.

Catalysts

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

• Waters Corporation is benefiting from a recovery in the analytical instruments market, with a strong focus on revitalizing their product portfolio, such as the Alliance iS and Xevo TQ Absolute systems. This innovation is expected to drive instrument sales upwards, impacting future revenue growth positively.
  
• The company is capitalizing on high-growth areas like GLP-1 and PFAS testing, and the expanding generics market in India. These areas are expected to contribute significantly to revenue growth, with GLP-1 and PFAS testing each adding about 30 basis points and India contributing 70 to 100 basis points to growth annually.
  
• Waters has been successful in increasing their service contract attachment rate, with over 50% of the installed base now covered. This is likely to enhance their recurring revenue streams, contributing to better net margins and overall earnings.
  
• The expected recovery in customer CapEx spending is anticipated to fuel a new cycle of instrument replacements, with sales potentially growing 2-3% above the long-term average growth. This improvement in instrument sales is likely to drive revenue and earnings growth.
  
• Given their strong free cash flow and improved net debt position, Waters is well-positioned to pursue strategic M&A opportunities or share repurchases in 2025, which can enhance EPS by either improving operational capacity or returning value to shareholders.

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 21.6% today to 24.7% in 3 years time.
• Analysts expect earnings to reach $858.0 million (and earnings per share of $15.14) by about March 2028, up from $637.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.6x on those 2028 earnings, down from 36.6x today. This future PE is lower than the current PE for the US Life Sciences industry at 42.5x.
• Analysts expect the number of shares outstanding to grow by 0.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.81%, as per the Simply Wall St company report.

Waters Future Earnings Per Share Growth

Risks

• The company faces significant foreign exchange headwinds, which could adversely impact their earnings despite strong operational performance. This risk could temper their non-GAAP earnings per share growth, which is expected to face a 4% decline due to forex effects.
  
• There is uncertainty around customer spending patterns, especially in the Academic and Government segments, which have historically been volatile. Potential budget cuts in agencies like NIH and EPA could lead to reduced instrument sales and impact revenue growth in these sectors.
  
• Although China showed signs of recovery, its growth remains modest and linked to stimulus, posing a risk to sales, particularly if domestic conditions weaken or the expected stimulus does not materialize. This could affect revenues in the Asia region.
  
• Macroeconomic and currency fluctuations could impact pricing and productivity, and the company's ability to achieve projected margin expansions might be challenged by these factors. Such issues could increase operational costs and shrink net margins.
  
• Despite plans for robust operational performance, there might be execution risk linked to capital allocation decisions, including M&A activity and share repurchase programs. If not accurately timed or integrated, these could adversely affect overall earnings performance.

Valuation

• The analysts have a consensus price target of $400.838 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 $450.0, 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 $3.5 billion, earnings will come to $858.0 million, and it would be trading on a PE ratio of 33.6x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $392.99, the analyst price target of $400.84 is 2.0% 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.