Waters (NYSE:WAT) is far from a household name among most investors. But millions of investors who use S&P 500 index funds as part of their investing strategy indirectly own shares of the medical-technology company, and those who've bought shares directly have to be pleased with the performance that Waters stock has given them recently.
But given the nice returns that the company has provided, investors should ask whether Waters has the potential to keep growing. Let's take a look at this little-known company to find out where its best prospects lie and how Waters is moving forward to try to capitalize on them.
What Waters does
Waters works to help scientists in numerous fields perform scientific analysis, with instruments that assist in the fields of liquid chromatography, mass spectrometry, and thermal analysis. Its products have application throughout the scientific professions, with companies in the pharmaceutical, life sciences, biochemical, and industrial sectors all having occasion to work with Waters to help them with develop and analyze their efforts in coming up with their own scientific innovations. With a history of that goes back 50 years, Waters' first major client was Dow Chemical, which invested $400,000 in the young company and eventually took a substantial stake in Waters before it merged with biosciences company Millipore in 1980.
Waters now has operations that span the globe, getting roughly 30% of its revenue from the U.S., a similar amount from Europe, and the remainder mostly from Japan, China, and other Asian countries. Given the substantial increase in scientific and industrial activity in Asia in recent decades, the region remains an important driver of growth for Waters.
How Waters stands up to the competition
Since coming public in 1995, the stock has performed extremely well, rising at an average annual clip of more than 17%.
But Waters is far from the only company serving the scientific community. Thermo Fisher Scientific (NYSE:TMO) is the giant in the industry, with more than six times as many employees as Waters and seven times the revenue that Waters generates. Moreover, Thermo Fisher is only poised to get larger in the near future, as the company announced in April that it would acquire Life Technologies (UNKNOWN:LIFE.DL) for $13.6 billion. The deal will give Thermo Fisher exposure to the promising genomic testing industry -- an area that has seen increasing growth as the costs of genetic analysis have come down and therefore begun to inspire more commercial viable applications -- and shows the rewards available to investors in companies like Life Technologies given the trend toward consolidation in the industry. Agilent Technologies (NYSE:A) is another major player in medical- and chemical-lab equipment, with its own liquid chromatography, mass spectrometry, and genomics capability. Despite recent challenges, Agilent still represents a threat to Waters' growth.
Why Waters has potential
In its most recent quarterly conference call, Waters executives indicated that they seemed content with the company's overall strategy going forward, with continued solid growth and conservative capital allocation. With its Alliance system providing quality control for makers of generic drugs, demand for generic versions of an increasing number of off-patent drugs should help Waters keep growing in the pharmaceutical segment. Meanwhile, Waters has seen a ramp-up in sales for mass spectrometry systems, encouraging the company as it rolls out advanced systems to maintain its leadership role in the industry. In China, Waters noted demand not only for traditional life-science and industrial instruments but also for equipment to analyze food quality and safety.
Waters does face some challenges, though. The decline in the value of the yen has made its Japanese business somewhat less profitable, although the company emphasizes that its Japanese business would stay profitable even if the yen weakens more substantially. Also, sequestration in the U.S. has caused some pressure given that government agencies like the National Institutes of Health have had to cut their overall spending levels.
Nevertheless, Waters remains focused on providing high-quality instruments to a number of growing industries. Investors should look closely at Waters stock as a means to capture the opportunities in those industries, with continued consolidation in the industry offering a potential bonus should Waters become a takeover target.
Click here to add Waters to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Thermo Fisher Scientific. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.