Citigroup Initiates Hold Rating on Waters Corp. (WAT)

Citigroup is out with a research report this morning, where it initiates a Hold rating on shares of Waters Corp. WAT; it has a $78.00 price target on the stock. The Citigroup analysts said, “While we have a positive bias towards companies with market leadership and proven tech. innovation (such as Waters), our neutral thesis is based on our view that WAT’s current relative multiple to the S&P 500 (1.4x vs. 1.2x historical) and YTD stock performance (highest return of its peers, excl. ILMN) already reflects improving instrument demand and sustainable UPLC adoption.” They noted, “Over the next 12 months, we believe WAT should benefit from new product introductions (UPLC and Mass Spec.), Industrial end market recovery, and strong free cash flow generation, leading to share buybacks/future M&A. Nonetheless, we remain on the sidelines until we get comfortable that the LC replacement market is developing, Agilent’s 1290 UPLC is market expanding rather than share shifting, and WAT’s overexposure to the weak pharma/biotech end markets is manageable with stronger performance from Industrials and Government/Academic customers.” They closed by saying, “(Our) $78 target price is based on a P/E multiple of 18x to our 2011E EPS of $4.35. We believe WAT EPS growth will continue to outpace S&P earnings growth through 2013, hence a sustainable 1.4x relative P/E which implies an 18x multiple. Also, with WAT’s LT EPS growth of 12% similar to its comp group (comps median at 13%), we believe that the group P/E is appropriate for WAT.”