Why Is Waters (WAT) Down 11.9% Since Last Earnings Report?

A month has gone by since the last earnings report for Waters (WAT). Shares have lost about 11.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Waters due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Waters' Q2 Earnings & Revenues Beat Estimates

Waters Corporation has reported second-quarter 2022 non-GAAP earnings of $2.75 per share, which surpassed the Zacks Consensus Estimate by 4.6%. Further, the bottom line improved 6% on a year-over-year basis.

Net sales of $714.3 million beat the Zacks Consensus Estimate of $705.6 million. The figure rose 5% and 10% from the year-ago quarter on a reported and constant-currency basis, respectively.

Top-line growth was driven by a solid momentum across pharmaceutical, industrial, and government and academic end markets. Strong performances in Asia and the Americas contributed well.

Top Line in Detail

Waters’ net sales figure can be categorized in four ways:

By Operating Segment: WAT operates under two organized segments, Waters and TA.

The Waters segment (89% of net sales) generated $635.1 million of sales, up 5% from the year-ago quarter. Sales in the TA segment were $79.2 million (11% of net sales), reflecting 7% year-over-year growth.

By Products & Services: The division comprises three segments — Instruments, Services and Chemistry.

Instruments sales (47% of sales) were $337.7 million, rising 7% on a year-over-year basis.

Service sales (34% of the sales) were $244.7 million, increasing 2% year over year.

Chemistry sales (19% of the sales) were $131.9 million, growing 4% from the year-ago quarter.

Moreover, the service and chemistry segments together generated recurring revenues of $376.6 million, increasing 3% from the year-ago quarter.

By Markets: Waters serves three end markets — Pharmaceutical, Industrial, and Governmental & Academic.

The Pharmaceutical market (61% of net sales) generated sales of $437.2 million, which increased 5% on a year-over-year basis.

The Industrial market’s (29% of sales) sales were $208.5 million, up 3% from the year-ago quarter.

Academic & Government (10% of sales) generated $68.6 million of the total sales. The figure increased 10% year over year.

By Geography: Waters’ operating regions include Asia, the Americas and Europe.

Asia (39% of net sales) generated $278.01 million of sales, up 3% on a year-over-year basis. Sales in China grew 9% from the prior-year quarter.

The Americas (36% of net sales) generated $257.3 million of sales, increasing 14% year over year. Sales in the United States increased 28% year over year.

Europe (25% of net sales) generated $179.04 million of sales, down 4% from the prior-year quarter’s level.

Operating Details

In the second quarter, non-GAAP selling and administrative expenses were $160.05 million, reflecting an increase of 1.6% from the year-ago quarter. As a percentage of net sales, the figure contracted 70 basis points (bps) year over year.

Research and development spending was $44.01 million, down 2.1% from the year-ago reported figure. As a percentage of net sales, the figure contracted 40 bps year over year.

The adjusted operating margin was 28.4%, which contracted 80 bps year over year.

Balance Sheet & Cash Flow

As of Jul 2, 2022, cash, cash equivalents and investments were $419.8 million, lower than $503.1 million as of Apr 2, 2022.

Account receivables stood at $639.4 million at the end of the second quarter, up from $607.3 million in the last reported quarter.

Waters generated cash from operation of $56.9 million in the reported quarter, down from $197.9 million in the prior quarter.

The company recorded a free cash flow of $67.3 million in the second quarter.

Guidance

For third-quarter 2022, Waters expects non-GAAP earnings of $2.50-$2.60 per share, which includes a foreign exchange headwind of 10%.

Waters anticipates net sales growth of 8-10% on a constant-currency basis. The company expects sales growth to decline six percentage points due to unfavorable foreign exchange fluctuations.

For 2022, Waters has revised the guidance for non-GAAP earnings upward from $11.90-$12.10 per share to $11.95-$12.05. This includes a foreign exchange headwind of 9%.

Waters has also increased its guidance for sales growth. It expects 2022 net sales growth of 9.5-10.5% on a constant-currency basis. Sales growth is likely to decline five percentage points due to currency translation. Previously, the company had anticipated net sales growth of 7.5-9% on a constant-currency basis.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

VGM Scores

At this time, Waters has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Waters has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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