Although the S&P 500 is down 1.6% over the past six months, Waters Corporation’s stock price has fallen further to $342.30, losing shareholders 8.5% of their capital. This may have investors wondering how to approach the situation.

Is there a buying opportunity in Waters Corporation, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Is Waters Corporation Not Exciting?

Despite the more favorable entry price, we're cautious about Waters Corporation. Here are three reasons why there are better opportunities than WAT and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Waters Corporation grew its sales at a mediocre 4.8% compounded annual growth rate. This fell short of our benchmark for the healthcare sector.

2. Core Business Falling Behind as Demand Plateaus

We can better understand Research Tools & Consumables companies by analyzing their organic revenue. This metric gives visibility into Waters Corporation’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, Waters Corporation failed to grow its organic revenue. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Waters Corporation might have to lean into acquisitions to accelerate growth, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus).

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Waters Corporation’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Waters Corporation isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 25.9× forward P/E (or $342.30 per share). This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now. We’d suggest looking at the most dominant software business in the world.

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