Waters Corporation (WAT)

Scientific instruments company Waters Corporation (NYSE:WAT) reported Q1 CY2025 results beating Wall Street’s revenue expectations, with sales up 3.9% year on year to $661.7 million. Guidance for next quarter’s revenue was better than expected at $751 million at the midpoint, 1.9% above analysts’ estimates. Its non-GAAP profit of $2.25 per share was 1.3% above analysts’ consensus estimates.

Company Overview

Founded in 1958 and pioneering innovations in laboratory analysis for over six decades, Waters (NYSE:WAT) develops and manufactures analytical instruments, software, and consumables for liquid chromatography, mass spectrometry, and thermal analysis used in scientific research and quality testing.

The life sciences subsector specializing in research tools and consumables enables scientific discoveries across academia, biotechnology, and pharmaceuticals. These firms supply a wide range of essential laboratory products, ensuring a recurring revenue stream through repeat purchases and replenishment. Their business models benefit from strong customer loyalty, a diversified product portfolio, and exposure to both the research and clinical markets. However, challenges include high R&D investment to maintain technological leadership, pricing pressures from budget-conscious institutions, and vulnerability to fluctuations in research funding cycles. Looking ahead, this subsector stands to benefit from tailwinds such as growing demand for tools supporting emerging fields like synthetic biology and personalized medicine. There is also a rise in automation and AI-driven solutions in laboratories that could create new opportunities to sell tools and consumables. Nevertheless, headwinds exist. These companies tend to be at the mercy of supply chain disruptions and sensitivity to macroeconomic conditions that impact funding for research initiatives.

Waters' main competitors in the analytical instruments market include Agilent Technologies, Shimadzu Corporation, Bruker Corporation, Danaher Corporation, and Thermo Fisher Scientific. In the thermal analysis segment, TA Instruments competes with Perkin Elmer, NETZSCH-Geraetebau, Malvern PANalytical, and Anton-Paar.

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With $2.98 billion in revenue over the past 12 months, Waters Corporation has decent scale. This is important as it gives the company more leverage in a heavily regulated, competitive environment that is complex and resource-intensive.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, Waters Corporation’s 4.8% annualized revenue growth over the last five years was mediocre. This fell short of our benchmark for the healthcare sector and is a rough starting point for our analysis.

Long-term growth is the most important, but within healthcare, a half-decade historical view may miss new innovations or demand cycles. Waters Corporation’s recent performance shows its demand has slowed as its revenue was flat over the last two years.

We can better understand the company’s sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations that don’t accurately reflect its fundamentals. Over the last two years, Waters Corporation’s organic revenue was flat. Because this number aligns with its normal revenue growth, we can see the company’s core operations (not acquisitions and divestitures) drove most of its results.

This quarter, Waters Corporation reported modest year-on-year revenue growth of 3.9% but beat Wall Street’s estimates by 1.2%. Company management is currently guiding for a 6% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 4.5% over the next 12 months. While this projection indicates its newer products and services will spur better top-line performance, it is still below the sector average.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Waters Corporation has been an efficient company over the last five years. It was one of the more profitable businesses in the healthcare sector, boasting an average operating margin of 28.6%.

Analyzing the trend in its profitability, Waters Corporation’s operating margin decreased by 1.5 percentage points over the last five years. A silver lining is that on a two-year basis, its margin has stabilized. Still, shareholders will want to see Waters Corporation become more profitable in the future.

This quarter, Waters Corporation generated an operating profit margin of 22.9%, up 1.9 percentage points year on year. This increase was a welcome development and shows it was more efficient.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Waters Corporation’s EPS grew at a decent 6.7% compounded annual growth rate over the last five years, higher than its 4.8% annualized revenue growth. However, this alone doesn’t tell us much about its business quality because its operating margin didn’t expand.

We can take a deeper look into Waters Corporation’s earnings to better understand the drivers of its performance. A five-year view shows that Waters Corporation has repurchased its stock, shrinking its share count by 4.7%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.

In Q1, Waters Corporation reported EPS at $2.25, up from $2.21 in the same quarter last year. This print beat analysts’ estimates by 1.3%. Over the next 12 months, Wall Street expects Waters Corporation’s full-year EPS of $11.91 to grow 11.1%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Waters Corporation has shown robust cash profitability, giving it an edge over its competitors and the ability to reinvest or return capital to investors. The company’s free cash flow margin averaged 19.9% over the last five years, quite impressive for a healthcare business.

Taking a step back, we can see that Waters Corporation’s margin dropped by 7 percentage points during that time. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal increasing investment needs and capital intensity.

Waters Corporation’s free cash flow clocked in at $233.8 million in Q1, equivalent to a 35.3% margin. The company’s cash profitability regressed as it was 1.4 percentage points lower than in the same quarter last year, but it’s still above its five-year average. We wouldn’t read too much into this quarter’s decline because investment needs can be seasonal, causing short-term swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Waters Corporation hasn’t been the highest-quality company lately, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 41.5%, splendid for a healthcare business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Waters Corporation’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Waters Corporation reported $382.9 million of cash and $1.46 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.10 billion of EBITDA over the last 12 months, we view Waters Corporation’s 1.0× net-debt-to-EBITDA ratio as safe. We also see its $61.39 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was great to see Waters Corporation’s revenue guidance for next quarter top analysts’ expectations. We were also happy its organic revenue narrowly outperformed Wall Street’s estimates. Overall, this print had some key positives. The stock remained flat at $350.53 immediately after reporting.

Updated: July 10, 2025 at 11:40 PM EDT

When considering an investment in Waters Corporation, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

Waters Corporation isn’t a terrible business, but it isn’t one of our picks. For starters, its revenue growth was mediocre over the last five years, and analysts don’t see anything changing over the next 12 months. And while its stellar ROIC suggests it has been a well-run company historically, the downside is its diminishing returns show management's prior bets haven't worked out. On top of that, its flat organic revenue disappointed.

Waters Corporation’s P/E ratio based on the next 12 months is 26.7x. This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think other companies feature superior fundamentals at the moment.

Wall Street analysts have a consensus one-year price target of $388.79 on the company (compared to the current share price of $353.28).