Waters Corp

The views expressed below are those of Anchor Capital Advisors, LLC (“Anchor”) as of the date written and are subject to change at any time. They are based on our proprietary research of the stated company and the following is a summary of the primary factors that support our beliefs and rationale for investing in the company. Please see additional disclosures at the end of this publication.

WAT: NYSE

Waters Corp is a global manufacturer of liquid chromatography (LC), mass spectrometry (MS), and thermal analysis (TA) products to a variety of customers in pharma, biotech, academics, government, and industrial end markets. The company was founded in 1958, and is headquartered in Milford, MA. [1]

Investment thesis

We believe Waters’ plays in three niches (LC, MS, and TA instruments) where market share has been stable over long periods of time.[2] Waters’ has strong margins, a strong return profile, and growth for many years into the future. The business has a strong recurring element, and is defensive in recessions.

Confirmation through research

LC instruments, which are 30% of revenue, are used to separate, identify, and quantitate compounds that are present in any sample that can be dissolved in a liquid. They have been used for manufacturing (e.g. during the production process of pharmaceutical and biological products), legal (e.g. detecting performance enhancement drugs in urine), research (e.g. separating the components of a complex biological sample, or of similar synthetic chemicals from each other), and medical (e.g. detecting vitamin D levels in blood serum) purposes.[3] Waters has 25% market share which has been stable for the last decade. MS instruments, which are 10% of revenue, are used to determine molecular aspects of samples, and TA instruments are used to identify physical characteristics of materials based on temperature. In both areas, we believe Waters has had stable share for the last decade.[4] The other 50% of the business is recurring consumables.[5] The company has had high returns, with over a 14% return on invested capital historically, and over an 11% return on assets.[6] Additionally, the company has high margins with over 30% operating margins.[7] The company is guiding mid-single digits bottom line growth this year, and can see a runway for many years into the future.[8] Further, the company grew earnings in the 2008 recession and 2001 recession.[9] We believe the CEO Chris O’ Connell, who took over in 2016, will bring forward new product introductions which should accelerate growth.

Variant Perception

The market is not assigning a fair value to the business considering the company’s growth, high margins, defensive nature, and strong return profile.