Jim Stack is well known for his "safety-first" approach to money management, focusing on a balance between risk and reward. In his InvesTech market Analyst, he notes, "We now see a window of opportunity in Waters (NYSE: WAT).
Here, Bruce Morison, consultant for Stack Financial Management, explains, "In a market overreaction to a weaker-than-expected fourth quarter, an opportunity has been created to invest in this high-quality company at an attractive valuation level.
"The stock dropped 20% when the company reported earnings that were $0.08 shy of the $1.06 estimate that Wall Street was forecasting. The shortfall was primarily a result of a higher-than-expected tax rate for 2007 and weaker sales in Japan.
"The Japan results reflected a change in government regulations for water testing. Our concern over this event is limited given that Japan accounts for less than 10% of the Waters' sales and is not a key growth market for the firm.
"A quick recap of the company ... Waters Corporation is a medium sized company based in Milford, Massachusetts which designs, manufactures, and services high performance liquid chromatography (HPLC) and mass spectrometry (MS) instrument systems.
"This complex equipment is designed for the relatively simple concept of separating and identifying chemicals. Its products help test air and water quality, analyze nutritional content of foods and develop drugs.
"Within the pharmaceutical and life science industries, its most significant end-use market, HPLC is used to identify new drugs, develop manufacturing methods, and to assu e the potency and purity of new pharmaceuticals.
"Approximately 68% of Waters' sales come from international markets. The Asian markets, particularly China and India, continue to produce strong results for the company, with revenue growing over 30% annually in these regions.
"Asian operations are benefiting from increasing market presence of generic drug makers and a significant increase in food safety and environmental testing by the Chinese government.
"Waters has strong fundamentals and a bright future. The company's commanding market share and technological leadership have helped produce a strong record of earnings growth and an enviable level of profitability.
"The key to the firm's dominance is its drive for innovation and unsurpassed technical performance. A high proportion of recurring revenue streams from consumables and service contracts generates strong free cash flow.
"Waters' free cash flow as a percentage of sales is currently 17% compared to 7% for the S&P500 Index. We conservatively forecast sustainable earnings per share growth in the 14%-16% range. It is important to note that the company's 2007 earnings that disappointed Wall Street were up 18% for the year.
"Waters' equipment can tell you exactly what is in the air you breathe and the food you eat, important information in a world demanding more detailed information, increasing government regulation, and environmental consideration.
"The company is also a clear beneficiary of the expected per capita increase in health care spending and the dramatic development of the Asian economies."
Each day, Steven Halpern's TheStockAdvisors.com offers the latest market commentary and favorite investment ideas from the nation's leading financial newsletter advisors.
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Reader Comments (Page 1 of 1)
3-22-2008 @ 6:41AM
rico said...
Hello,
such investments are called "green investment" here in germany. I´ve found something like that you´ve told about. Look at my blog if you like: http://finanzierung-investment.de
Greetings from germany!