Waters

Waters' second-quarter results included 9% revenue growth on an organic, constant-currency basis and adjusted earnings per share growth of 3%. Management raised its 2026 guidance for revenue growth from its legacy and acquired assets as well as adjusted EPS growth.

Why it matters: Shares rose about 6% in Aug. 4 intraday trading, suggesting that investors continue to appreciate this momentum play in the life science industry. Legacy Waters delivered 8% instrument growth and 10% chemistry growth in the quarter. We were pleased to see its pharmaceutical and academic/government end markets both grow at a double-digit pace. The Becton Dickinson asset merger is going well too, with that business already growing at its mid-single-digit goal this quarter, despite Chinese diagnostic headwinds. For 2026, Waters increased its sales expectation to $6.415 billion-$6.476 billion from $6.405 billion-$6.455 billion and increased its adjusted EPS outlook to 10%-12% growth to $14.45-$14.65 from 10%-11% growth to $14.40-$14.60.

The bottom line: After mildly increasing our 2026 expectations to reflect these solid trends and the slightly higher outlook, our $349 fair value estimate did not change materially. Waters shares are trading above our fair value estimate and may move into moderately overvalued territory. Our 2027-28 views remain above FactSet consensus, and we still expect positive profit growth catalysts for Waters through 2030 on trends like reshoring by drug manufacturers, refreshing instruments purchased during the pandemic boom, and potential artificial intelligence-related demand and cost-control efforts. Waters' wide economic moat appears intact, although the recently completed BD deal pushed it down in the quality spectrum. Integration-wise, we take comfort from the management team's prior work at previous employer Merck KGaA, including acquiring Sigma-Aldrich in 2015, and initial BD efforts so far.

BLANK PAGEFor more details on the life science industry's recent history and potential profit growth catalysts in one of the moatiest parts of this industry where Waters excels, please see our research publish in March, "After a Long Reset Period, Life Science Stocks Look Set to Rebound."

Our fair value estimate of $349 per share includes the recent BD merger.

Overall, we see positive catalysts on the horizon, including planned reshoring efforts by Waters' biopharmaceutical clients and refreshing pandemic-era instruments that are reaching the end of their lifespan. These catalysts could accelerate Waters' profit growth primarily in 2027-30. But similar to the postpandemic reset that we have seen since late 2022 in this industry, we think there may be a significant reset period following that upswing as well. Although we think that growth can accelerate significantly through 2030, our 10-year expectations look roughly in line with more typical demand trends in the company's end markets. For example, through 2035, we expect Waters to generate revenue growth of 6% and adjusted earnings per share growth of 11% on an annualized basis.

We believe a wide moat still surrounds Waters’ business after the merger with BD's life science and diagnostic tools business. Legacy Waters consists primarily of liquid chromatography, mass spectrometry, and thermal analysis tools, which we have long viewed as a wide-moat entity. BD's business looks weaker than the legacy Waters business but should still be moaty. Generally, diagnostics and discovery-related life science firms are probably in the narrow moat category, but they still benefit from similar moat sources as Waters' business. Even after the merger, we still expect Waters to benefit from intellectual property and ongoing innovation that create an intangible asset moat source. At the same time, regulatory and reproducibility factors still contribute to durable switching costs, in our opinion, albeit probably shorter in duration than legacy Waters. Both intangible assets and switching costs will remain crucial to Waters’ advantages in its target markets. Also, Waters has historically enjoyed economic profitability near the top of the life science market, and with that large economic profit margin, it should be able to largely withstand the headwinds that a big merger like the one with BD can bring.

Intangible Assets

Waters offers differentiated technology that is protected by various intangible assets, including patents, copyrights, and trademarks. This intellectual property keeps competitors from directly copying its technology. Since even slightly differentiated technical features can cause an end user to prefer one tool over another similar tool in Waters’ precise scientific end markets, intangible assets around its differentiated technology remain a moat source. The differentiated properties of Waters’ tools affect the performance, accuracy, and speed of the various projects they enable, and differentiated product features create intangible assets that inform decisions to use those tools in specific applications, particularly at the beginning of a project. To remain relevant to scientists in early project phases, Waters must continue to innovate effectively, too, and its ongoing innovation, especially after a CEO change in 2020, gives us confidence in its ability to stay relevant in its chosen markets in the long run.

Switching Costs

After the initial choice of its tools based on intangible assets, Waters benefits from substantial switching costs in most of its end markets, and its key liquid chromatography platforms enjoy very sticky revenue streams. These revenue streams are particularly sticky with very long potential "legs" in the biopharmaceutical end market In this end market, Waters’ analytical tools are critical components of the production methods for various drugs, which are specified directly in each molecule’s regulatory application for approval in markets around the world. Regulators require that the selected method be used to produce a drug, unless updated with regulators, which would add time, money, and regulatory scrutiny to the production process that most end users (drugmakers) do not want to spend, especially just to change out one life science tool that represents a small percentage of the relevant drug’s manufacturing cost. With those regulatory factors and other reproducibility and employee training factors, Waters benefits from significant switching costs at its biopharmaceutical customers that can lead to decades ' worth of demand for its tools. For example, in the branded phase of a small-molecule drug's life, that period can last roughly 20 years from discovery until patent expiration. For large molecules (or biologics), that period can last even longer because of the complex manufacturing process. Also, once a drug’s key patents expire, generic and biosimilar manufacturers often try to mimic the same production methods as the branded manufacturer to reduce product variability, and that adoption by generic and biosimilar manufacturers can create an even longer benefit period for Waters if a molecule remains in demand by consumers. Overall, Waters’ concentration in the highly regulated biopharmaceutical end market extends the prospects for economic profits over such a long period that we view Waters as a wide-moat firm, which sets the company apart from the many narrow-moat life science and diagnostic companies that typically enjoy less concentration in this highly durable field.

Due to less-intense regulatory requirements, we see narrower, but still strong, moats around Waters’ other end markets. However, intangible assets and switching costs support Waters’ moat in most of those end markets, too. Throughout its operations, Waters’ analytical instruments have long useful lives (typically five to ten years), and Waters often benefits from a razor-and-blade business model during each instrument’s lifecycle.

Recurring revenue stands to rise to over 70% after the BD merger. Pricing power for the organization appears positive overall, too, with annual price appreciation primarily from consumables and services. Waters has noted that its pricing power rises with the regulation of its end markets, which correlates well with our view of the wider moat in biopharmaceutical applications compared with its other end markets. We think that relates to the interoperability of Waters’ consumable products, including chromatography columns, on competitive instrumentation. Therefore, in less regulated markets, the end users appear more sensitive to technological differences and pricing on related products and services during and at the end of an instrument’s lifecycle than in more regulated markets. However, we think some reproducibility- and training-related switching costs are still present in most of Waters’ end markets, even if they are not as highly regulated as the biopharmaceutical business.

Waters' analytical instruments remain the gold standard in several applications, especially LC-MS for biopharmaceutical firms, where regulations preserve consistent recurring sales for many years.

Historically, Waters has maintained a disciplined capital allocation strategy that has preserved returns on invested capital near the top of the industry. Even after the recent BD merger, ROICs look likely to remain solid.

Waters continues to benefit from expanding branded and generic biopharmaceuticals and the increase in food safety and environmental testing by various entities.

With the recent BD merger, Waters could run into integration issues and other challenges while transitioning from a very focused firm to a more diverse one.

Competition from the likes of Agilent, Merck KGaA, and Thermo Fisher puts consistent pressure on Waters to innovate.

The postpandemic reset period has created questions around the ongoing growth trajectory for life science tools like the ones Waters sells.