Waters Corp. (WAT) Q2 Preview: Will It Beat Earnings Again?

We expect Waters Corporation (NYSE:WAT) to beat earnings expectations when it reports second-quarter 2016 earnings results before the opening bell on Jul 26.

In the last reported quarter, Waters Corp. posted a positive earnings surprise of 2.4%. The company boasts a solid earnings track record, having beaten estimates in each of the trailing four quarters. The average earnings surprise over the last four quarters is a positive 2.3%.

We expect the company to post an earnings beat in the about-to-be-reported quarter.

Why a Likely Positive Surprise?

Our proven model shows that Waters Corp. is likely to beat earnings because it has the right combination of two key ingredients.

Zacks ESP: The Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +1.38%. This is very meaningful and a major indicator of a likely earnings surprise.

Zacks Rank: Waters Corp. carries a Zacks Rank #2 (Buy). Note that stocks with a Zacks Rank #1 (Strong Buy), #2 or #3 (Hold) have a significantly higher chance of beating earnings estimates. Sell-rated stocks (#4 and #5) should never be considered going into an earnings announcement.

The combination of Waters Corp.’s Zacks Rank #2 and ESP of +1.38% makes us confident of an earnings beat in the upcoming report.

Growth Factors This Past Quarter

Waters Corp. is riding high on strong end markets performance, striking growth in recurring-revenue products and robust growth momentum in China and India. These persistent trends look set to drive growth for the company in the upcoming results.

Waters Corp.’s leading position in the high-performance liquid chromatography and mass spectrometry markets is its key strength and has acted as a strong revenue driver over the past few quarters. The company expects its pharmaceutical business to generate healthy profits for the quarter under review as well. As liquid chromatography is used in a variety of applications including drug discovery, development, quality control of drug products, therapeutic drug monitoring, proteomics, metabolomics, environmental analysis, and food analysis, Waters Corp. stands to benefit significantly from this business.

As a matter of fact, Waters Corp.’s exposure in the pharma/biotech industry is primarily in regulated commercial lab environments, where demand is non-discretionary and not prone to cyclicality. This cushions the company from the vagaries of client spending thereby favoring financial performance. Moreover, the company has also been constantly expanding its technological and business portfolio through its acquisition strategy. These factors will lend strength to the company’s results in the quarter-under-review.

We believe the previously acquired businesses like ElectroForce Group are likely to be conducive to second-quarter 2016 results. In addition, innovative product launches will continue to fuel top-line performance. Also, the recently upgraded REIMS research system and revamped portfolio of CORTECS Solid-Core LC Columns are expected to widen the customer base of the company going forward.

Despite these positives, exchange rate volatility and escalating debt levels and interest expenses may thwart the growth momentum at the company to some extent. In addition, higher operating expenses, particularly research and development expenses, might cast a shadow on Waters Corp.’s margins and profitability.

Stocks That Warrant a Look

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

The Earnings ESP for Potlatch Corp. (NASDAQ:PCH) is +42.86% and it carries a Zacks Rank #2. The company is expected to release its quarterly results on Jul 26.

AK Steel Holding Corp. (NYSE:AKS) has an Earnings ESP of +100.00% and a Zacks Rank #2. The company will report results on Jul 26.

Landec Corp. (NASDAQ:LNDC) has an Earnings ESP of +6.67% and a Zacks Rank #3. The company is expected to release earnings results on Jul 26.