3 Reasons to Avoid WAT and 1 Stock to Buy Instead

Waters Corporation trades at $306.57 per share and has stayed right on track with the overall market, gaining 5.7% over the last six months. At the same time, the S&P 500 has returned 6.6%.

Is there a buying opportunity in Waters Corporation, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Is Waters Corporation Not Exciting?

We're swiping left on Waters Corporation for now. Here are three reasons we avoid WAT and a stock we'd rather own.

1. Slow Organic Growth Suggests Waning Demand In Core Business

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’s organic revenue averaged 2.1% year-on-year growth. This performance slightly lagged the sector and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations.

2. Shrinking Adjusted Operating Margin

Adjusted operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies because it excludes non-recurring expenses, interest on debt, and taxes.

Looking at the trend in its profitability, Waters Corporation’s adjusted operating margin decreased by 13.7 percentage points over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was 17.1%.

3. New Investments Fail to Bear Fruit as ROIC Declines

We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.

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. That said, the stock currently trades at 22.5× forward P/E (or $306.57 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at one of our all-time favorite software stocks.

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