Waters Corporation (WAT), a this little-known company, makes tools that help scientists and researchers analyze the safety, quality, and durability of science-based, consumer-facing products, explains Tony Daltorio, editor at Investors Alley.

Waters’s tools help its customers perform scientific research by providing them with analytical instruments, services, and supplies. Nearly 90% of the company’s revenue comes from its Waters division, which produces mass spectrometry and liquid chromatography tools, as well as related products.

These tools are used primarily by pharmaceutical firms to analyze a molecule’s structure during the drug discovery, development, and production processes. These tools can also be used in food and environmental quality testing, as well as other industrial applications.

This may sound like a small, very niche business, but many of the Waters’ instruments are clearly in demand across a number of industries. That is why the company was able to deliver organic year-on-year revenue growth of 15% in the third quarter.

However, it won’t be an easy road for Waters. Although the company recently raised full-year revenue growth guidance from 11.5% to 12% (up from 9.5% to 10.5% previously), it cut its earnings-per-share (EPS) forecast in anticipation of foreign exchange headwinds.

Currency volatility — and a strong U.S. dollar — is a material risk for the company. That’s because Waters makes about 40% of its sales in Asia, and another quarter of its sales in Europe.

Investors will be closely watching those margins and EPS numbers for signs that an in-progress “turnaround” initiative is yielding results.This turnaround was needed because Waters’ growth had underperformed expectations in recent years.

That resulted in a change in management, including bringing in Udit Batra — formerly CEO of the MilliporeSigma, the $7.7 billion life science tools business of Germany’s Merck KGaA — as the new CEO in 2020. Batra has aimed to reinvigorate the company through an instrument replacement drive, as well as strengthening its technology and e-commerce offerings.

The turnaround seems to be working. In the third quarter, it enjoyed impressive instrument growth of 21% in constant currency terms (14% reported). This should bode well for future recurring revenue growth from the sale of instruments and related services. About half of its sales are already recurring revenues.

And importantly, Waters’ analytical instruments remain the gold standard, especially in liquid chromatography and mass spectrometry for pharmaceutical firms. That is a firm base from which to launch a turnaround. It’s also why Waters enjoys profitability near the top of the life sciences market, with returns on invested capital over 30%.

Waters also has a major tailwind behind it — the expanding universe of biopharmaceuticals testing and the increase in food safety and environmental testing by various entities. Add it all up and Waters is a buy anywhere in its recent range of $300 to $350, in anticipation of more progress in its corporate turnaround story.

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