Waters Corporation has been treading water for the past six months, recording a small return of 3.5% while holding steady at $318.35. The stock also fell short of the S&P 500’s 34.7% gain during that period.
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Why Is Waters Corporation Not Exciting?
We're cautious about Waters Corporation. Here are three reasons there are better opportunities than WAT and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, Waters Corporation’s 6% annualized revenue growth over the last five years was mediocre. This was below our standard for the healthcare sector.
2. Core Business Falling Behind as Demand Plateaus
In addition to reported revenue, organic revenue is a useful data point for analyzing Research Tools & Consumables companies. This metric gives visibility into Waters Corporation’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Waters Corporation failed to grow its organic revenue. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Waters Corporation might have to lean into acquisitions to accelerate growth, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Waters Corporation’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Waters Corporation isn’t a terrible business, but it doesn’t pass our quality test. With its shares lagging the market recently, the stock trades at 23.2× forward P/E (or $318.35 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at one of our top software and edge computing picks.
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