As the market climbed off its 2011 lows late last year, we continued to point to signs of improving growth in the Investment Comments section of the December Investor Advisory Service. U.S. Gross Domestic Product (GDP) was growing 2.5% annualized. Excluding changes in inventory levels, “real final sales” was up 3.6%. Retail sales had risen for 16 straight months.

Asian economies appeared steady. Brazil’s torrid growth was moderating but remained strong. Europe was the big headache, showing signs of economic contraction. We emphasized that our stock selections tend toward “secular” growth stories, meaning companies that can continue to grow without much lift from the overall economy.

Two of the three companies we profiled have declined. One (hhgregg, inc.) fell so precipitously we booted it out of the IAS. Another, Shire PLC, makes a repeat appearance in this month’s IAS as a featured company. Let’s take a look at the winner of the bunch, Waters Corp (Ticker: WAT).

Waters makes equipment for chemical separation and identification. Its customers include food, pharmaceutical, chemical, and plastics companies. Instrument sales are about half of revenue. Services and consumable supplies comprise the other half. Like many IAS companies, Waters generates a lot of cash. The company favors share buybacks over acquisitions or dividends and has steadily reduced its total share count since we started following the company in the IAS, bringing total shares outstanding down by 30% since 2003.

We featured the company because we liked its leading-edge product line, which we thought gave the company a chance to gain significant market share when overall business investment spending improved. Unfortunately, those levels haven’t bounced back yet. Performance has been somewhat better in the U.S., which produces 30% of overall company revenue. However, fully 30% also comes from Europe, a market which has underperformed even our low expectations over the past year.

The company’s quarterly financial results have told a story of relatively solid performance amidst a very difficult economic environment. A relatively strong U.S. dollar in 2012 has dragged down reported sales growth. Q4 2011 got the company off to a good start after our profile, but that strength didn’t last. The quarter saw an 8% sales gain, along with 13% EPS growth. In the fourth quarter, performance in Europe was actually especially strong, with sales up 14% adjusting for currency fluctuations. That trend would reverse, however, and the stock would give up the quick gains it had scored. Sales fell 2% in Q1 2012, and EPS fell 3%. Pharma was the weakest end-market, which has heavy European exposure. U.S. pharma was also weak, however. Q2 was only slightly better. Europe was a drag, and Japan also stopped growing. The stronger U.S. dollar turned 4.5% underlying sales growth into reported growth of just 1%.

Waters recently reported Q3 2012 results, which saw a 4% EPS increase despite a 1% decline in reported sales. Quarter-to-quarter, EPS can be lumpy for most companies due to the various “puts and takes” that impact company expense levels and overall margins. Q3 is the type of quarter that we consider characteristic of what makes Waters an attractive investment. It’s extraordinarily hard for a company to increase earnings when overall sales decline. Speaking very generally, EPS normally moves in the same direction as sales, and the overall magnitude of EPS change is typically bigger. Through buybacks and careful cost management, however, Waters has produced some small EPS growth in spite of headwinds from currency and the economy.

At a recent price of $83.18, Waters stock is up 5% in the last year. December 2011 was a bad month for our stock picks. Even our best performer lagged the S&P 500’s double digit gains over the next 12 months. The good news is that the company’s underlying financial performance has been consistent, if unspectacular during the last year. The valuation remains similar, and we think the investment case is still intact. 

Disclaimer: This company was selected for review in part because of its performance over the past year. Any outperformance relative to the broader market is not necessarily indicative of performance of the broader Investor Advisory Service.