Waters Corporation (WAT): Is This a Buy After Strong Q2 Earnings and Raised Guidance?

Waters Corporation (NYSE: WAT) has delivered a compelling case for long-term investors with its Q2 2025 earnings report, which highlighted robust revenue growth, margin expansion, and a bold strategic pivot into high-growth markets. With sales up 9% year-over-year to $771 million and non-GAAP EPS surging 12% to $2.95, the company has not only exceeded guidance but also raised full-year 2025 expectations. However, the true test for investors lies in whether this short-term momentum translates into sustainable long-term value creation—particularly as Waters prepares to integrate BD's Biosciences & Diagnostic Solutions business in a transformative $17.5 billion Reverse Morris Trust deal.

Strong Q2 Execution: A Launchpad for Long-Term Growth

Waters' Q2 results underscore its ability to execute in a competitive analytical instrumentation market. The company's Instruments segment grew in the mid-single digits, driven by high-single-digit demand for liquid chromatography (LC) and mass spectrometry (MS) systems, while recurring revenue rose 11%, fueled by double-digit chemistry sales and 9% service revenue growth. These metrics reflect a maturing business model that balances capital-intensive instrument sales with sticky, high-margin recurring streams—a critical edge in capital-constrained industries like pharmaceuticals.

Geographically, Waters' Asia-Pacific region delivered 14% constant-currency growth, outpacing the Americas and Europe. This diversification is a strategic win, as emerging markets increasingly adopt advanced analytical tools for drug development and regulatory compliance. Meanwhile, the pharmaceutical sector drove 11% market growth, outperforming the 6% industrial segment and stabilizing the -3% academic and government segment.

The company's full-year guidance now reflects optimism: constant-currency sales growth of +5.5% to +7.5% and non-GAAP EPS of $12.95–$13.05 (up 9–10% year-over-year). These revisions suggest Waters is not just riding a short-term cycle but has a durable playbook for scaling its core business.

Recurring Revenue: A Foundation for Resilience

Waters' shift toward recurring revenue is a standout strength. Recurring revenue now accounts for over 30% of total sales, with service and chemistry segments growing at 9–11%. This model reduces exposure to cyclical instrument purchases and creates a predictable cash flow base. For example, pharmaceutical companies increasingly rely on Waters' service contracts to maintain compliance with evolving regulatory standards, while the rise of generic drug development drives demand for chemistry consumables.

The company's 11% recurring revenue growth also aligns with broader industry trends. As drugmakers prioritize cost efficiency and operational excellence, Waters' role as a provider of “end-to-end” solutions—from instrument replacement to QA/QC software—becomes more critical. This stickiness is a defensive moat in an otherwise capital-intensive sector.

Strategic Expansion: Biopharma and Diagnostics as Growth Catalysts

The pending acquisition of BD's Biosciences & Diagnostic Solutions business is Waters' most significant growth lever. This $17.5 billion transaction, expected to close by Q1 2026, will double Waters' total addressable market to $40 billion and diversify its revenue base into high-margin biopharma and diagnostics.

The strategic rationale is compelling:
- Technology Synergy: Waters' LC-MS platforms will integrate with BD's flow cytometry and PCR technologies, creating a comprehensive suite for biologics QA/QC and multiplex diagnostics.
- Recurring Revenue Boost: BD's diagnostics business already generates 70% annual recurring revenue, a model Waters can replicate in its core markets.
- Market Expansion: The combined entity will target $30 billion in high-growth adjacents, including bioseparations, GLP-1 drug testing, and PFAS analysis.

Financially, the deal is projected to deliver $345 million in EBITDA synergies by 2030, with revenue synergies (e.g., cross-selling into BD's clinical channels) offsetting cost synergies. The transaction is also accretive to adjusted EPS in year one and expected to generate mid-teens EPS growth over five years.

Risks and Considerations

While the long-term outlook is bullish, investors must weigh execution risks:
1. Integration Challenges: Merging BD's biopharma expertise with Waters' analytical workflows will require cultural and operational alignment.
2. Regulatory Hurdles: The deal still needs regulatory approvals, with potential delays or conditions affecting synergies.
3. Competition: Thermo Fisher and Danaher are expanding in diagnostics and biopharma, threatening Waters' market share if it falters.

Investment Thesis: Buy for the Long Haul

Waters' combination of strong core execution, recurring revenue momentum, and a high-conviction strategic pivot makes it a compelling long-term buy. The company is transitioning from a niche instrument provider to a diversified life sciences and diagnostics leader, with the BD acquisition serving as a catalyst.

Key metrics to watch:
- Post-merger revenue mix: A shift toward 70% recurring revenue by 2030 would validate the strategic bet.
- Margin expansion: Waters aims for 500 bps of adjusted operating margin improvement, a realistic target given cost synergies.
- EPS growth: Mid-teens adjusted EPS growth over five years could outpace peers like Agilent (A) and PerkinElmer (PKI).

For investors with a 5–10 year horizon, Waters offers a rare combination of proven operational discipline, strategic vision, and a clear path to margin expansion. The near-term stock price may be volatile as the BD deal approaches regulatory scrutiny, but the long-term rewards for a successful integration are substantial.

Final Verdict: Waters is a buy for long-term investors who can tolerate short-term volatility and are positioned to capitalize on the life sciences and diagnostics boom. With a robust balance sheet, recurring revenue momentum, and a transformative acquisition on the horizon, WAT is well-positioned to deliver market-leading returns.