Scientific instruments company Waters Corporation (NYSE:WAT) beat Wall Street’s revenue expectations in Q4 CY2024, with sales up 6.5% year on year to $872.7 million. On the other hand, next quarter’s revenue guidance of $652.8 million was less impressive, coming in 2.8% below analysts’ estimates. Its non-GAAP profit of $4.10 per share was 1.7% above analysts’ consensus estimates.

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"We delivered excellent results in the fourth quarter, led by double-digit growth in Pharma, while instruments and recurring revenue both grew high single-digits in constant currency," said Dr. Udit Batra, President & CEO, Waters Corporation.

Company Overview

Founded in 1958, Waters Corporation (NYSE:WAT) develops and manufactures high-performance liquid chromatography (HPLC), mass spectrometry (MS), and thermal analysis systems for laboratories.

Research Tools & Consumables

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.

Sales Growth

A company’s long-term sales performance signals its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Waters Corporation’s 4.2% annualized revenue growth over the last five years was mediocre. This was below our standard for the healthcare sector and is a rough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within healthcare, a half-decade historical view may miss recent innovations or disruptive industry trends. Waters Corporation’s recent history shows its demand 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 averaged 1% year-on-year declines. 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 year-on-year revenue growth of 6.5%, and its $872.7 million of revenue exceeded Wall Street’s estimates by 1.9%. Company management is currently guiding for a 2.5% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 4.6% over the next 12 months. While this projection suggests its newer products and services will spur better top-line performance, it is still below average for the sector.

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Operating Margin

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 28.4%.

Analyzing the trend in its profitability, Waters Corporation’s operating margin of 27.9% for the trailing 12 months may be around the same as five years ago, but it has decreased by 1.5 percentage points over the last two years. This dynamic unfolded because it struggled to adjust its fixed costs while its demand plateaued.

This quarter, Waters Corporation generated an operating profit margin of 33.5%, up 1.2 percentage points year on year. This increase was a welcome development and shows it was recently more efficient because its expenses grew slower than its revenue.

Earnings Per Share

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Waters Corporation’s EPS grew at a decent 5.5% compounded annual growth rate over the last five years, higher than its 4.2% 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 quality 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 7.3%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.

In Q4, Waters Corporation reported EPS at $4.10, up from $3.62 in the same quarter last year. This print beat analysts’ estimates by 1.7%. Over the next 12 months, Wall Street expects Waters Corporation’s full-year EPS of $11.87 to grow 8%.

Key Takeaways from Waters Corporation’s Q4 Results

We enjoyed seeing Waters Corporation exceed analysts’ organic revenue and EPS expectations this quarter. On the other hand, its revenue and EPS guidance for next quarter fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock traded down 1.5% to $399.50 immediately after reporting.

Waters Corporation didn’t show it’s best hand this quarter, but does that create an opportunity to buy the stock right now? If you’re making that decision, you should consider the bigger picture of valuation, business qualities, as well as the latest earnings. We cover that in our actionable full research report which you can read here, it’s free.