Waters Corporation Quarterly Valuation – June 2014 $WAT
Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies with a Low Beta. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Waters Corporation (WAT) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Waters Corporation (Waters) is an analytical instrument manufacturer that primarily designs, manufactures, sells and services, through its Waters Division, high performance liquid chromatography (HPLC), ultra performance liquid chromatography (UPLC and together with HPLC, referred to as LC) and mass spectrometry (MS) technology systems and support products, including chromatography columns, other consumable products and post-warranty service plans. Through its TA Division, the Company primarily designs, manufactures, sells and services thermal analysis, rheometry and calorimetry instruments. The Company is also a developer and supplier of software-based products that interface with the Company’s instruments and are typically purchased by customers as part of the instrument system. The Company operates in two segments: Waters Division and TA Division. In January 2012, the Company acquired Baehr Thermoanalyse GmbH. In July 2012, the Company acquired Blue Reference, Inc.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years -Â PASS
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 -Â FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend -Â FAIL
- Earnings growth – EPSmg greater than 5 years ago – PASS
Valuation Summary
Key Data:
| Recent Price | $102.57 |
| MG Value | $119.60 |
| MG Opinion | Fairly Valued |
| Value Based on 3% Growth | $73.57 |
| Value Based on 0% Growth | $43.13 |
| Market Implied Growth Rate | 5.86% |
| NCAV | $9.17 |
| PEmg | 20.21 |
| Current Ratio | 4.46 |
| PB Ratio | 4.78 |
Balance Sheet – 3/29/2014
| Current Assets | $2,607,700,000 |
| Current Liabilities | $584,400,000 |
| Total Debt | $1,100,000,000 |
| Total Assets | $3,649,700,000 |
| Intangible Assets | $591,700,000 |
| Total Liabilities | $1,830,400,000 |
| Outstanding Shares | 84,780,000 |
Earnings Per Share
| 2014 (estimate) | $5.26 |
| 2013 | $5.20 |
| 2012 | $5.19 |
| 2011 | $4.69 |
| 2010 | $4.06 |
| 2009 | $3.34 |
| 2008 | $3.21 |
| 2007 | $2.62 |
| 2006 | $2.13 |
| 2005 | $1.74 |
| 2004 | $1.82 |
Earnings Per Share – ModernGraham
| 2014 (estimate) | $5.07 |
| 2013 | $4.82 |
| 2012 | $4.45 |
| 2011 | $3.92 |
| 2010 | $3.38 |
| 2009 | $2.89 |
Conclusion:
Waters corporation satisfies the Enterprising Investor but not the Defensive Investor.  The Defensive Investor has concerns with the lack of dividend payments and the high price-to-earnings and price-to-book ratios.  The Enterprising Investor’s only major concern is the lack of dividend payments.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities through a review of ModernGraham’s valuation of Agilent Technologies (A) and ModernGraham’s valuation of Sigma-Aldrich (SIAL).  As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $3.38 in 2010 to an estimated $5.07 for 2014.  This level of demonstrated growth supports the market’s implied estimate of 5.86% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value falling within a margin of safety relative to the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Waters Corporation (WAT)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Be sure to review the previous ModernGraham Valuations of Waters Corporation (WAT)!
Disclaimer: Â The author did not hold a position in Waters Corporation (WAT) or any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.
