Agilent Technologies Inc. (NYSE:A) is the world's premier measurement company and a technology leader in chemical analysis, life sciences, diagnostics, electronics and communications.
Marketing efforts and cost reductions
After the spin off its Electronic Measurement business, Agilent reduced its exposure to the cyclical EM industry. The firm is focusing on the life science, diagnostics and chemical analysis businesses.
When thinking about Agilent�s catalysts, what comes into my mind are its marketing and distribution infrastructure. Both of them are crucial in generating profitability, while maintaining its leader position among its peers. Furthermore, the company is making efforts to reduce costs that should also boost profitability.
Looking at the operating margin, we can see that it is expanding, and this is a clear positive sign for the company.
Emerging markets
Expanding its reach in emerging markets is a good strategy. China and India are very attractive markets because of the large population and fast growing rates. Moreover, R&D�s efforts made revenue from emerging markets reach more than one-third of its business.
One major risk could be lower-than-expected demand, but its direct presence in those countries should help customer relationships to become solid and offset the risk.
Revenues, margins and earnings
Revenues have slightly decreased by less than 1% in the fourth quarter when compared to the same quarter one year ago, to $1.03 billion from $1.04 billion. Along with this, EPS significantly increased in the quarter compared to the same quarter a year ago.
During the past fiscal year, the company increased its bottom line. It earned $1.29 per share versus 59 cents per share in the previous year. This year, Mr. Market expects an improvement in earnings ($1.89 versus $1.29).
Operating margin is higher than the industry median, reaching more than 14% as of July. Moreover, the net margin is at 10% at the end of July. But regarding ratio analysis, what matters most is the evolution, and although both have suffered declines in recent years, they began to grow in the past year.
The next table shows Agilent's earnings estimates, which are used as a benchmark to measure a firm's performance against how experts' expectations. An ideal candidate for a long position might be a company with five years of solid earnings growth and strong earnings growth estimates for the future. I think a minimum of two years is also attractive. Further, earnings surprise is important because it can move a company's stock price.
| Earnings History | Jan 15 | Apr 15 | Jul 15 | Oct 15 |
| EPS Est | 0.41 | 0.39 | 0.41 | 0.47 |
| EPS Actual | 0.41 | 0.38 | 0.44 | 0.50 |
| Difference | 0.00 | -0.01 | 0.03 | 0.03 |
| Surprise % | 0.00% | -2.60% | 7.30% | 6.40% |
Source: Yahoo Finance
In the last two quarters, the company surprised the market, and this generated a positive outlook for the next quarters.
Return on equity
I always look at one of the most important financial ratios and the best measure of performance for a firm's management: the return on equity. The ratio has slightly decreased from the same quarter one year prior. Let�s compare the current ratio, as of July, with the peer group in the next table:
| Ticker | Company Name | ROE (%) |
| A | Agilent | 9.97 |
| TMO | Thermo Fisher Scientific | 9.63 |
| ILMN | Illumina | 31.54 |
| WAT | Waters Corp. | 24.70 |
The leading health care firm has a ratio of 9.97% that is higher than the one registered by Thermo Fisher Scientific (TMO), but lower than Waters Corporation (WAT). I think that a ROE greater than 30% is enough to provide dividends to owners and have enough funds for future growth of the company. For investors looking for a higher ROE, Illumina Inc. could be the option exceeding this level.
It is vital to understand this metric before investing, and it is important to look at the trend in ROE over time.
As we can see, Agilent's ROE decreased in the past five years, generating some concern as the company appears to be less efficient in using funds from stockholders to produce a return.
Relative valuation
From a valuation standpoint, the company trades at a 47.9 P/E, a premium compared to the industry mean. This indicates that other companies operating in the same sub-industry are less richly valued. The following table compares the current valuations of its competitors:
| Ticker | Company | P/E Ratio |
| A | Agilent | 47.9 |
| TMO | Thermo Fisher Scientific | 27.46 |
| ILMN | Illumina | 53.10 |
| WAT | Waters Corp. | 23.12 |
Waters Corp. trades at almost 23 times trailing earnings, Thermo Fisher trades at a P/E of 27.5 and Illumina at a 53.1 P/E. Waters Corp. looks the most attractively valued company when looking back the trailing ratio. At the current price level, Agilent is relatively expensive compared to its peers, and it is ranked lower than 71% of the 94 companies in the Global Diagnostics & Research industry.
Guru holdings
One prominent investor in the stock is Larry Robbins (Trades, Portfolio), with 4.59 million shares valued at $157.4 million, held as of the end of the third quarter of 2015. Other gurus who have initiated new positions in the stock are Andreas Halvorsen (Trades, Portfolio) and Louis Moore Bacon (Trades, Portfolio) with 218,650 and 60,000 shares. Also, RS Investment Management (Trades, Portfolio) has 1,301,270 shares.
Final comment
As outlined in the article, the health care company has good catalysts, enough presence in international markets, and its quarter results (and the ratios) are improving. However, the P/E ratio makes the stocks relatively overvalued. Moreover, considering that the price is near its 10-year high, I think investors should wait to bet in this stock.
Disclosure: As of this writing, Omar Venerio did not hold a position in any of the aforementioned stocks.
This article first appeared on
GuruFocus.