Waters Earnings: Delayed Biopharma Spending Curbs 2023 Sales Outlook

Wide-moat Waters WAT reported weak first-quarter results, as biopharmaceutical clients reined in spending on its tools, and management pushed down its sales guidance for 2023. However, the team also maintained its profit expectations for the year, and at first glance, we expect to maintain our $280 fair value estimate based on this announcement. Waters shares look about fairly valued, in our opinion.

In the quarter, Waters reported a deceleration in constant currency revenue growth to 3% (below management’s expectation for 4% to 6% growth in the first quarter), and exchange rate headwinds contributed to a reported sales decline of 1%. Instrument revenue growth declined 3% year over year in constant currency, as biopharmaceutical customers delayed spending on these one-time costs in a more uncertain environment, particularly in the U.S. and China. Recurring revenue remained resilient, though, with Waters turning in 8% recurring revenue growth in constant currency in the quarter. On the bottom line, adjusted EPS declined 11% to $2.49 (below management expectations of $2.55 to $2.65 for the first quarter), including about 800 basis points of foreign exchange headwinds.

Recognizing those challenges, management reduced its sales forecast for the year but kept its adjusted EPS target intact. Specifically, for 2023, the company now expects 3% to 5% constant currency sales growth (5.5% to 7.5% reported), which is down from 5% to 6.5% constant currency sales growth (6% to 8.5% reported) previously. However, with expected cost controls, management is still shooting for $12.55-$12.75, or 4%-6%, growth year over year, including some foreign exchange headwinds and dilution from the recently announced Wyatt deal that will increase the firm’s exposure to the typically fast-growing large molecule end market. While we have tinkered with our expectations after this announcement, our valuation has not changed materially, and shares are trading down toward fair value in the pre-market.