We maintain a Neutral recommendation on Waters Corporation (WAT).
The company reported disappointing first-quarter 2012 results, due to weak performance in developing markets and lower spending by large pharmaceutical companies. However, we currently maintain a Neutral rating on Waters as the company is very confident about good growth in fiscal 2012, driven by stable demand for its products.
Waters Corporation is an analytical instrument manufacturer. The company's products are used by pharmaceutical, life science, biochemical, industrial, academic and government customers, who are working in research and development, quality assurance and other laboratory applications. The company believes its strong competitive position and strategic market initiatives will facilitate it to perform well as it moves ahead. Major competitors of Waters are Agilent Technologies Inc. (A), PerkinElmer Inc. (PKI) and Thermo Fisher Scientific Inc. (TMO).
Further, the company continues to see relevant stability in its end markets and continued momentum in the acceptance of new products. A rise in sales resulting from increase in pharmaceutical customers is also beneficial for the company. Biopharmaceutical development and QC testing continues to facilitate pharma growth.
However, in the recent quarter, the company’s result suffered from declined capital spending by large pharmaceutical firms. Further, performance in certain developing markets was also weak during first-quarter 2012. Though the negative effects of these were partially offset by smaller specialty and biopharma firms in the U.S., total revenue inched down 2% year over year.
Sales from government agencies account for 5% of the company’s recent worldwide sales. During the first quarter, government and university shipments declined at a mid-single-digit rate due to significant reductions in global governmental spending. The prevailing macroeconomic uncertainties are a matter of concern, blurring the company’s growth expectations for 2012 in relation to its performance during the past two years.
Positively, the demand for the company’s products and services are intact. Based on this, the company is confident of attaining good result in the remaining part of 2012. Waters has a strong presence in the chromatography instrument market, which is expected to grow annually over the longer term.
Further, the company continues to introduce new products. With increased systems offerings of Discovery-branded instruments, the TA division is expected to expand in 2012 and beyond. The division will also benefit from expanding its applications footprint into biological and high temperature material testing opportunities.
Waters Corporation currently has a Zacks #3 Rank (Hold recommendation) over the next one-to-three months.
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