Morningstar | Waters Delivers Better Performance in 2Q; Raising FVE Slightly, Shares Fairly Valued. See Updated Analyst Note from 24 Jul 2018
Waters' performance in the second quarter was largely as expected. We're raising our fair value estimate to $185 per share, mainly due to cash flows realised since our last report. Shares are fairly valued at current levels, and we reiterate our wide moat rating for the firm.Waters' top line was up 5% in constant currency, a rebound from the weak first-quarter results. Mass spectrometry, the main culprit for underperformance in the first quarter, improved sequentially, but high-resolution mass spec sales remain soft. Pharma spending grew 4% in constant currency, and Big Pharma is seemingly reining in spending after several years of strong expansion. The TA segment's rejuvenation continued in the quarter, and this segment was largely responsible for the 3% growth in the industrial/applied end market. Revitalising TA's product portfolio has resulted in year-to-date double-digit growth, on the heels of 9% growth in 2017. TA's strong performance is helping to mask relative weakness from the core Waters division.
Declining revenue in the U.S. (down 2%) in the quarter was largely due to decelerating biomedical research and the aforementioned large pharma softness. China was up 14% in the quarter, offsetting flat results in India. The company's recurring revenue stream was up 8%, supporting the mid-single-digit top-line full-year guidance and our forecast, despite Waters' instruments sales being roughly flat so far.
The firm's gross and operating margins showed good year-over-year improvement, but in line with our expectations. The company's updated earnings guidance range is in alignment with our forecast.
Waters is a holding company. Through its subsidiaries, the company is a specialty measurement company. The company primarily designs, manufactures, sells and services high performance liquid chromatography, ultra performance liquid chromatography and mass spectrometry technology systems and support products, including chromatography columns, other consumable products and post-warranty service plans. In addition, the company designs, manufactures, sells and services thermal analysis, rheometry and calorimetry instruments through its TA? product line. The company is also a developer and supplier of software-based products that interface with its instruments, as well as other manufacturers' instruments.
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