Waters: Earnings Preview

Oct.25.10 | About: Waters Corporation (WAT)

Waters Corp. (WAT) is slated to report its third quarter 2010 earnings on October 26, 2010 before the opening bell. The current Zacks Consensus Estimate for the third quarter is 97 cents per share, representing a year-over-year growth of 4.3%. Waters has surpassed earnings estimates consistently in the last four quarters with a trailing four-quarter average surprise of 3.55%.

Second Quarter Recap
Waters Corp.’s second quarter 2010 per share from continuing operations was 90 cents, an increase of 25% from 72 cents in the second quarter of 2009.

On the top line, Waters outperformed the Zacks Consensus Estimate by merely $3 million, reporting total revenue of $391 million. Total revenue during the quarter increased by 8% year over year as the company experienced strong demand for its products in key markets.

Specifically, Waters’ chromatography and mass spectrometry systems that was launched in the first half of 2010 received rapid customer acceptance. Moreover, contributing to the company’s revenue growth was recovery in demand for its TA Instruments business and high sales growth in Asia. Foreign currency translation negatively impacted the company’s sales by 1%.

The company provided third quarter sales growth estimate, excluding currency effect, of 8%. Including foreign exchange effect of 2%, sales growth was expected to be approximately 6%. For 2010, Waters’ expected organic sales growth to be between 7% and 8%. Currency translation was expected to reduce sales growth by about 1%. New product introductions, a strong ramp of sales of new H-Class products and a building backlog of orders provided management confidence that the organic growth of the business is on more stable footing in 2H10. But the prevailing general economic uncertainties led the company to maintain a cautious growth outlook for the fourth quarter of 2010.

The company expects 2010 non-GAAP diluted EPS to be in the range of $3.92 to $4.02. Non-GAAP is expected to be between 93 cents and 97 cents for the third quarter.

Agreement of Analysts

Estimate revisions for Waters have been scarce over the past week and month. Over the past 30 days, only 1 of the 17 analysts covering the stock have reduced estimates for the third quarter, with an equal number moving in the opposite direction. Estimates for 2010 have been revised upwards by 2 analysts with 1 moving in the opposite direction over the last 30 days.

Magnitude of Estimate Revisions
Estimates for the third quarter of 2010 have remained static at 97 cents over the last 60 days due to a lack of significant estimate revisions by the analysts following the stock. Estimates for 2010 remained unchanged over a similar time-period.

Our Take & Recommendation
Currently, we have a Neutral recommendation on the stock. Moreover, Waters holds a Zacks #3 Rank, which translates into a short-term Hold rating and correlates with our long-term view. Through its focused business strategy, the company is quite optimistic of attaining its top and bottom line pre-recessionary growth rates. However, due to the continued uncertain economic environment, a cautious stance is preferred at the current level.

Waters has a strong presence in the chromatography instrument market, which is expected to grow annually over the longer term. The company is one of the top three players in the mass spectrometry market. It is expected to experience a sustained healthy performance in its organic sales growth over the next few years based on the strong customer demand in mass spectrometry and HPLC.A significant portion of Waters’ revenue is derived from recurring revenue sources, including consumables and services, which are expected to continue to increase over the longer term.

However, the analytical instrument and systems market is highly competitive. Waters encounters competition from several worldwide instrument manufacturers and other companies in both domestic and foreign markets for each of its three technologies. The company competes in its markets primarily on the basis of instrument performance, reliability, service, and to a lesser extent, price. Some competitors have instrument businesses that are generally more diversified, but are typically less focused on the company’s chosen markets. Some competitors have greater financial and other resources than Waters.

Major competitors of Waters are Agilent Technologies Inc. (A), Life Technologies Corporation (LIFE) and Thermo Fisher Scientific Inc. (TMO).

Waters Corporation, an analytical instrument manufacturer, designs, manufactures, sells and services, high performance liquid chromatography, ultra performance liquid chromatography and mass spectrometry instrument systems and support products, including chromatography columns, other consumable products and comprehensive post-warranty service plans.