In this article, let's take a look at the world's premier measurement company and a technology leader in chemical analysis, life sciences, diagnostics, electronics and communications, Agilent Technologies Inc. (A).
Divestiture and Strategic Acquisition
This past November, Agilent spun off its Electronic Measurement business as a separate publicly traded company named Keysight Technologies (KEYS). This move was important because Agilent takes some benefits such as greater focus on the business and the reduction of exposure to the cyclical EM industry. Now the firm can focus on on the life science, diagnostics and chemical analysis businesses.
Agilent acquired Denmark-based cancer diagnostic company, Dako. This company is a leading provider of cancer diagnostics tools, which provides antibodies, reagents, scientific instruments and software primarily to pathology laboratories for cancer diagnostics. While searching for revenue growth, Agilent has expanded its presence in life science. I believe this strategic move was in the correct direction considering a growing clinical market.
Emerging Markets
I think that expanding footprint in emerging markets is also a good strategy considering China, the largest economy in the future, or India with its fastest growth rate. Agilent's revenue from emerging markets is growing and it has reached more than one-third of its business due to significant R&D investment it has made, with presence in key markets. Among the risks that may arise in such regions, a lower than expected demand it is the most probable issue that could affect the company. This risk is minimized by the growing concern and recognition of environmental protection, as a way for reaching better quality of life.
Revenues, Margins and Earnings
Revenue decreased by 2.54% in the second quarter when compared to the same quarter one year prior, to $963 million from $988 million. Along with this, earnings per share significantly increased by 116.2% in the second quarter compared to the same quarter a year ago. During the past fiscal year, the firm reported lower earnings ($0.98 versus $2.11) but the market expects a 73.4% improvement in earnings to $1.70. The company also has provided some guidance. For the third quarter it expects earnings in the range of $0.38 to $0.42 per share and for fiscal 2015 it expects earnings in the range of $1.67 to $1.73 per share.
Operating margin is higher than the industry median, reaching 11.11% as of April 2015. Moreover, the net margin is at 8.62% at the end of April 2015. But in terms of ratio analysis, what matters most is the evolution, and both have suffered declines in recent years. It is fair to say that they were not so significant.
In the next table, we can appreciate Agilent's earnings estimates, which are used as a benchmark to measure a firm's performance relative to how experts expected it would do.A good candidate for a long position might be a company with five years of solid earnings growth and strong earnings growth estimates for the coming years. I actually think at least two years. Further, earnings surprise is important because it can move a company's stock price.
| Earnings History | Jul 14 | Oct 14 | Jan 15 | Apr 15 |
| EPS Est | 0.74 | 0.89 | 0.41 | 0.39 |
| EPS Actual | 0.78 | 0.88 | 0.41 | 0.38 |
| Difference | 0.04 | -0.01 | 0.00 | -0.01 |
| Surprise % | 5.40% | -1.10% | 0.00% | -2.60% |
Source: Yahoo Finance
For three quarters the company fails to surprise the market, and this generated a slight concern.
Return on Equity
I always like to see one of the most important financial ratios applying to stockholders, 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 April 2015, with the peer group in the next table:
| Ticker | Company Name | ROE (%) |
| A | Agilent | 7.91 |
| TMO | Thermo Fisher Scientific | 7.61 |
| ILMN | Illumina | 35.43 |
| WAT | Waters Corp | 20.46 |
The leading health care firm has a ratio of 7.91% which 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 quite 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. (ILMN) could be the option exceeding this level.
It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
| Year | Oct-05 | Oct-06 | Oct-07 | Oct-08 | Oct-09 | Oct-10 | Oct-11 | Oct-12 | Oct-13 | Oct-14 |
| ROE (%) | 8.55 | 85.57 | 18.54 | 23.93 | -1.22 | 23.86 | 26.86 | 24.3 | 13.83 | 9.52 |
Agilent's ROE decreased slightly over the 2013-2014 period and this can also generate some concern as the company appears to be less effective in using funds from stockholders to generate return.
Relative Valuation
From a valuation standpoint, trading at a 41.2 P/E, which stands at a premium compared to the industry mean which 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 | 41.2 |
| TMO | Thermo Fisher Scientific | 29.90 |
| ILMN | Illumina | 73.80 |
| WAT | Waters Corp | 24.20 |
Waters Corp. trades for almost 24 times trailing earnings, Thermo Fisher trades at a P/E of 29.9 and Ilumina at a 73.8 P/E. Waters Corp. looks the most attractively valued looking back the trailing ratio. Considering the relative valuation, at the current price level I think Agilent is relatively expensive compared to its peers.
Hedge Funds Holdings
I always like to see which hedge funds have long positions in the stock. Ken Griffin�s Citadel Investment Group held 3.23 million shares at the end of the first quarter. The value of the stake amounted to $134.19 million. Although the stock gained only 1.49% in that period, Mr. Griffin has almost doubled the stake by 93%. Another prominent investor in the stock is Israel Englander, with 1.42 million shares, valued at $59.35 million, held as of the end of the first quarter of 2015.
Final Comment
As outlined in the article, the division into two industry-leading public companies and the acquisition of attractive Dako's products in order to complement Agilent's existing diagnostics offerings should help reverse the decline in sales.
According to the P/E ratio, which is nearly a five-year high, the stock is relatively overvalued and subject to a potential sell recommendation. Because the stock market is forward looking, stock prices are established based on the expectations that investors have for the future earnings power of the firm. A proxy for the market's expectations is analysts' consensus earnings estimates which we have seen it fails to surprise for some time.
Its stock price performance growth over the past five years was the lowest between peers. Although the actual price level is indicating a relatively overvaluation, the consensus 12-month price target is $45.5, a 15.1% expected increase from current prices, which is an attractive return.
Last but not least, the company has approved a new share repurchase program at the end of the past month, replacing the existing one which has $365 million remaining. I think this is positive because it is signaling that the company is undervalued.
To sum up, there is no compelling reason to buy or sell the stock right now, so the answer to the obvious question "Should you buy, sell or hold Agilent?" for me in this moment is a hold recommendation. Additionally, the majority of analysts rate Agilent as a hold, which makes me feel more comfortable.
Disclosure: As of this writing, Omar Venerio did not hold a position in any of the aforementioned stocks.
This article first appeared on
GuruFocus.