Waters Turns in Strong Q4

Wide-moat Waters WAT reported strong fourth-quarter results that helped it slightly exceed our expectations in 2022. However, its guidance for 2023 appears roughly as expected, and the Wyatt acquisition announcement (light scattering technology used primarily in large molecule analysis) looks a bit pricy. We are maintaining our $280 fair value estimate, and shares continue to trade moderately above that.

In the quarter, Waters reported a deceleration in constant currency revenue growth to 9% and exchange rate headwinds pushed reported sales growth down to 3%. The company’s growth was led by instruments (10% in constant currency) followed closely by recurring revenue (7%). With a more proactive strategy under new management, Waters’ salesforce has been busy updating legacy instruments in the field, and its R&D team has developed new technologies that remain in high demand from customers, which should be followed by recurring revenue for years to come. However, on the bottom line, results looked weaker due to foreign exchange headwinds, including adjusted EPS growth of only 5%, including about 800 basis points related to foreign exchange headwinds. However, those headwinds were slightly weaker than expected, which allowed Waters to exceed its previous expectation of $11.85-$11.95 of 2022 adjusted EPS by turning in $12.02.

In 2023, management expects reported sales growth of 6% to 8.5%, including 100 basis points of foreign exchange headwinds and 200-300 basis points of acquisition benefits from the Wyatt transaction that is projected to close in the second quarter. While that top-line expectation looks a bit above our projections, our adjusted EPS expectation was already within management’s target range of $12.55-$12.75, or only 4%-6% year over year, including some foreign exchange headwinds and dilution from the Wyatt deal. While we have tinkered with our expectations a bit after these announcements, our valuation has not changed materially.