Waters Corporation: Getting Cheaper, But Not Cheap Enough (NYSE:WAT)

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One rule of thumb when it comes to investing that some investors overlook is that it’s necessary to distinguish between a good company and a company that is worth investing in. A company might be a decent, good, or even excellent operator, but if shares are trading at levels that don’t make sense fundamentally, then investors might just be putting their capital somewhere that will either lose the money or not make them the return that they want. One example of a good company that looks either fairly valued or overpriced today is Waters Corporation (NYSE:WAT). Although recent financial performance for the business has been robust, shares are lofty enough that they don’t yet make sense for investors to buy into. At least this is the case if investors want market-beating returns.

The picture is getting better

Back in January of this year, I wrote an article wherein I discussed whether Waters Corporation would make for an attractive opportunity for value-oriented investors. At that time, I acknowledged that the business had seen some lumpy results from a fundamental perspective in the preceding few years. But at the same time, I found myself impressed with its consistent cash flow generation and even went so far as to call it a good company with a bright future. But given how shares were trading at the time, I said the company is either fairly valued or slightly overpriced. This led me to rate the enterprise a ‘hold’, indicating my belief that shares should generate a return similar to what the market should over time. So far, that rating has held up well. Even as the S&P 500 has dropped by 13.5%, shares of Waters Corporation have generated a loss of 11.9%.

Historical Financials

Author – SEC EDGAR Data

This decline in price has come even as the fundamental condition of the business looks better than it has in a while. At the time of my last article, we only had data covering the first nine months, or three quarters, of the company’s 2021 fiscal year. Today, we now have results covering through the first quarter of 2022. For the 2021 fiscal year as a whole, the business reported revenue of $2.79 billion. That represents an increase of 17.8% over the $2.37 billion generated in 2020. For 2021, product sales were particularly high, rising by 22% compared to the year prior at a time when service revenue increased a more modest 11%. The company attributed a significant portion of this rise to a 23% increase in instrument system sales caused by strong customer demand as customer laboratories and manufacturing facilities continued to return to normal operations following the darkest days of the COVID-19 pandemic.

On the bottom line, the company also performed quite well. Net income for 2021 was $692.8 million. That’s 32.8% above the $521.6 million reported for 2020. Other profitability metrics also performed well. Though this does come with one caveat. You see, operating cash flow actually did worsen year over year, falling from $790.5 million in 2020 to $747.3 million last year. But if we adjust for changes in working capital, the metric would have jumped from $688 million to $861.4 million. Over that same window of time, EBITDA also improved, climbing from $815.8 million to $988.5 million.

Historical Financials

Author – SEC EDGAR Data

When it comes to the company’s 2022 fiscal year, things are off to a pretty solid start. Revenue of $690.6 million was 13.5% higher than the $608.5 million reported the same time one year earlier. Profitability metrics also generally improved. Net income rose from $148.1 million to $159.8 million. Operating cash flow did worsen again, dropping from $218.4 million to $198 million. But if we adjust for changes in working capital, it would have risen from $190.6 million to $217 million. And finally, we have EBITDA. According to management, this metric came in at $258.2 million. That compares to the $210.9 million reported just one year earlier.

For the 2022 fiscal year as a whole, management has provided some guidance. Overall revenue should come in at between 4.5% and 6% above what it did in 2021. At the midpoint, this would imply sales of $2.93 billion. The company also anticipates earnings per share, on an adjusted basis, of between $11.90 and $12.10. At the midpoint, this translates to adjusted net income of $722.8 million. No guidance was given when it came to other profitability metrics. But if we assume that those which increase at the same rate that earnings should, then adjusted operating cash flow should be around $898.7 million, while EBITDA should total about $1.03 billion.

Trading Multiples

Author – SEC EDGAR Data

To value the company, I merely compared these cash flow and earnings metrics to the company’s pricing metrics. Using our 2021 results, we can see that the company is trading at a price-to-earnings multiple of 29.1. This is down slightly from the 32.7 the company was trading for when I last wrote about it. The price to adjusted operating cash flow multiple has also improved, falling from 28 to 23.4. Meanwhile, the EV to EBITDA multiple has actually increased some, inching up from 21.2 to 21.4. If we use our 2022 estimates, the picture does look a bit better. These multiples would be 27.9, 22.5, and 20.5, respectively. As part of my analysis, I also decided to compare the company to the same five firms that I compared it to in my last article. On a price to operating cash flow basis, these companies ranged from a low of 14.7 to a high of 44.1. Using the EV to EBITDA approach, the range was from 3 to 44.5. In both cases, three of the five companies were cheaper than Waters Corporation if we used the data from 2021. Using the price to earnings approach, these companies ranged from a low of 4.1 to a high of 89.7. In this case, only two of the five companies were cheaper than our prospect.

Company Price/Earnings Price/Operating Cash Flow EV/EBITDA
Waters Corporation 29.1 23.4 21.4
Bio-Rad Laboratories (BIO) 4.1 27.5 3.0
PerkinElmer (PKI) 24.5 14.7 15.5
ICON Public Limited (ICLR) 89.7 17.7 29.4
Bio-Techne Corp. (TECH) 67.5 44.1 44.5
Avantor (AVTR) 36.0 20.4 19.5


All the data right now shows that Waters Corporation continues to improve at a nice pace. Absent something material changing, I don’t see this picture worsening. Long term, I am optimistic about the company from an operational perspective. However, even though shares have dropped some, I cannot yet get behind it in a bullish manner. Instead, I have decided to retain my ‘hold’ rating on the business, believing that its returns will probably closely mirror the market for the foreseeable future.