Waters (WAT) Down 5.6% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Waters (WAT). Shares have lost about 5.6% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Waters due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Waters' Q4 Earnings & Revenues Top Estimates

Waters Corporation (NYSE:WAT) reported fourth-quarter 2019 non-GAAP earnings of $3.20 per share, which surpassed the Zacks Consensus Estimate by 5.9%. However, the figure improved 11.5% on a year-over-year basis and 50.2% sequentially.

Net sales of $716.3 million beat the Zacks Consensus Estimate of $713.9 million. The top line was up 0.2% from the year-ago quarter on the reported basis and 1% on constant currency basis. Further, the figure improved 24.1% from the prior quarter.

Sluggishness in year-over-year top-line growth can be attributed to softness in pharmaceutical and industrial market. Further, the company encountered weakness in the Americas and Europe regions during the third quarter.

Nevertheless, Waters witnessed solid momentum across Europe and the governmental & academic market during the reported quarter.

Further, the company remains optimistic regarding strengthening growth initiatives and increasing R&D activities aimed at bolstering the new product cycle, which are likely to instill investor optimism in the near term.

Top Line in Detail

Waters’ net sales figure can be categorized in four ways:

By Operating Segment: The company operates in two organized segments — Waters and TA.

Waters segment (88.6% of net sales) generated $634.31 million of sales, up 1.5% from the year-ago quarter. Sales in TA segment came in $81.99 million and accounted for 11.4% of the net sales. The figure reflected year-over-year decline of 8.8%.

By Products & Services: This division comprises three segments — Instruments, Services and Chemistry.

Instruments sales (52.6% of sales) came in $376.6 million, down 3.9% on a year-over-year basis.

Service sales (31.7% of the sales) were $227.4 million, improving 5% year over year.

Chemistry sales (15.7% of the sales) were $112.2 million, advancing 5.4% from the year-ago quarter.

Moreover, service and chemistry sections together generated recurring revenues of $339.7 million, up 5% from the year-ago quarter.

By Markets: The company serves three end markets — Pharmaceutical, Industrial and Governmental & Academic.

Pharmaceutical market (54.8% of net sales) generated sales of $392.4 million, down 1% on a year-over-year basis.

Industrial market (30.3% of sales) sales came in $216.7 million, down 1% from the year-ago quarter.

Governmental & Academic (14.9% of sales) generated $107.2 million of sales. The figure improved 8% year over year.

By Geography: This company’s operating regions include Asia, Americas and Europe.

Asia (36.6% of net sales) generated $261.9 million of sales, down 0.3% on a year-over-year basis.

Americas (34.2% of sales) generated $245.1 million of sales, decreasing 1% year over year.

Europe (29.2% of sales) generated $209.2 million of sales, up 3% from prior-year quarter.

Operating Details

In the fourth quarter, non-GAAP selling and administrative expenses were $139.4 million, suggesting a decline of 2.6% from the year-ago quarter.

Per management, research and development spending was $37.1 million, indicating a decline of 2.7% form the year-ago reported figure.

Adjusted operating margin was 33.6%, which contracted 90 bps year over year.

Balance Sheet & Cash Flow

As of Dec 31, 2019, cash, cash equivalents and investments came in $337.1 million, lower than $404.65 million as of Sep 28, 2019.

Further, total liabilities were $2.8 billion, up from $2.4 billion in the prior quarter.

Waters generated cash from operation of $191.9 million in the fourth quarter, up from $148.4 million in the previous quarter.

Further, free cash flow of $157.6 million in the reported quarter.

Guidance

For first-quarter 2020, Waters expects non-GAAP earnings in the range of $1.55-$1.65 per share.

The company anticipates net sales growth between 0% and 2% on a constant currency basis.

For 2020, Waters expects non-GAAP earnings in the range of $9.15-$9.40 per share.

Further, the company’s net sales growth on a year-over-year basis is anticipated between 1% and 3 on a constant currency basis.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -12.97% due to these changes.

VGM Scores

At this time, Waters has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. It's no surprise Waters has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.