Morningstar | Weak 3Q for Waters; Shares Fairly Valued
Waters' performance in the third quarter was weaker than expected, and the company slightly lowered its full-year guidance on both the top line and earnings, as it anticipates a few adverse trends to persist for the remainder of the year. We anticipate lowering our growth forecast slightly, but the impact on our fair value estimate is not overly significant, as we were baking in a growth moderation going into 2019. Shares are fairly valued at current levels, and we reiterate our wide moat rating for the firm.Waters' top line was up 3% in constant currency, and the company continues to underperform its industry peers, particularly on the mass spec side, where the company has admitted being late with a product refresh cycle. Pharma spending grew 2% in constant currency, and Big Pharma, particularly in Europe, is reining in spending after several years of strong expansion. The TA segment also delivered sequentially weaker results, albeit attributed to timing of orders; nonetheless, this segment has been a bright star for Waters this year, which has helped to mask relative weakness from the core Waters division. By geographies, U.S. bounced back slightly in the quarter, but Europe, particularly pharma, had a rough quarter. China was up by double digits yet again, but India now looks to be a soft spot for the rest of the year.
The firm's gross and operating margins were in line with our expectations, as the company is adjusting its operating expenses, with the exception of research and development, or R&D, in line with its softer revenue growth.
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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