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Morningstar | Waters Has Underperformed Expectations Recently but Long-Term Prospects Remain Attractive

Waters' leadership in the liquid chromatography and mass spectrometry market gives it a compelling inherent competitive edge--the company’s large installed base of instruments generates high consumables utilization and benefits from a sticky base of sophisticated biopharma customers. In relative terms, Waters enjoys a greater portion of sales from high margin consumables and higher exposure to the biopharma market than close peers, such as Agilent. Additionally, the greater product sophistication for liquid chromatography makes these products sell at considerably higher price points than gas chromatography counterparts.Waters' greater exposure to the biopharma market should also enable higher growth relative to peers. The need for LC/MS to lead biological molecule research and characterization has led to high demand for Waters' products over the past few years, which is a trend we expect to continue although at a slower pace. We estimate the biologics customer segment has grown at a nearly low-double-digit annualized pace over the last decade and now represents about 20% of Waters’ customer base.Waters’ growth has underperformed expectations recently, but we anticipate exposure to China and new product innovation will remain key growth drivers to Waters’ business. We believe Waters’ weakness has stemmed in part from underperformance in its thermal analysis segment, tougher year-over-year comps in its biopharma business, and likely modest market share losses to competitors, like Agilent, that have stepped up their LC-MS product offerings. Although management has mistimed the product refresh cycle, in our view, the company’s BioTOF mass spectrometer in development with launch in 2019, for instance, will cater specifically to the development and quality analysis needs of biopharma customers and should help the company regain its footing. Meanwhile, sales in China as a percentage of revenue have more than doubled over the last decade and now represents close to 17% of total sales. Despite growing concerns over tariffs affecting Chinese customer purchases, we still anticipate healthy demand for Waters’ sophisticated and high-performance products.