This Instrument Maker Is a Good Fit for Your Portfolio

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Agilent Technologies (NYSE: A) is one of my favorite stocks to watch because it is a potential fit for virtually any portfolio. When investing for the long term, diversification is the name of the game, and Agilent gives shareholders exposure to such industries as communications, electronics, life sciences, chemicals, and medical instruments. The company also looks pretty attractive on a valuation basis, with excellent earnings growth expected over the next few years. With Agilent set to report their third quarter earnings on Wednesday, August 14, let’s take a closer look and see if this might be a good way to add some diversity to your portfolio, or if another company might be a better deal right now.

About Agilent

As I mentioned already, Agilent produces electronic instruments and equipment for a wide variety of end markets. The company’s products include oscilloscopes, signal generators, spectrum analyzers, atomic force microscopes (AFM), automated X-ray inspection, electronic design automation (EDA) software, and a variety of life science and chemical analysis equipment. About half of the company’s sales come from electronic measurement equipment, with life sciences and chemical analysis equipment each accounting for about 23% of the total revenue.

Agilent has a very widespread global presence, with over 60% of its sales coming from international markets. The company’s U.S. business has been somewhat of a drag lately, as sequestration has adversely affected Agilent’s sales to the government, which make up over 10% of the total. As a result, the company’s revenues are projected to drop slightly this year. 

Why it’s a good buy

Despite the small drop in revenue, Agilent is actually projected to grow its earnings due to the company’s recent restructuring efforts, as well as cost efficiencies that are expected to result from their recent major acquisition (Dako). Shares currently trade for 16.5 times this year’s expected earnings of $2.78 per share, which are expected to grow to $3.18 and $3.62 in 2014 and 2015, respectively.

So, while a large portion of the company’s earnings depends on the continued improvement of the economy, and specifically on the ability of congress to figure out the budget mess, I think shares are very fairly valued with annual earnings growth of 14.4% and 13.8% expected. That said, before we go jumping in; let’s see what other options are out there.

Other options

There are many other options out there other than Agilent that have similar business models and can add exposure to several sectors to your portfolio with a single investment, so let’s take a look at a couple of these to see if they might be an even better value.

Danaher (NYSE: DHR) is about three times the size of Agilent in terms of market cap, and is one of the world’s largest makers of hand tools and test equipment for a variety of industries. The company’s five segments are life sciences, test and measurement, industrial technologies, environmental, and dental, all of which contribute at least 10% of Danaher’s total sales. Danaher seems to be a bit more expensive than Agilent at first glance, with shares trading for 19.8 times this year’s expected earnings, which are projected to grow by 11.8% and 10.3% annually for the next two years. Additionally, I don’t like Danaher’s balance sheet quite as much, as Agilent has a positive net cash position (more cash than debt), and Danaher does not.

Thermo Fisher Scientific (NYSE: TMO) is between the other two in size and is a little less diverse than the other two, focusing mainly on life sciences and laboratory instruments. I chose to include Thermo Fisher, despite its lack of diversity, for its industry-leading position in the end markets it serves. Thermo Fisher comes in between the other two at a P/E of 17.2, with about 10% annual growth expected going forward. Risk-wise, the company’s industry-leading position and diversity of products within the life sciences and health care industries make it a pretty safe play. However, at the current share price, Thermo Fischer is a bit expensive, but it is certainly worth watching for better buying opportunities.

Final thoughts

After looking at a few of the alternatives, Agilent does in fact seem like an excellent value right now. I would wait until after the volatility of earnings is behind us before jumping in,  and any of the company’s comments on how sequestration is affecting (or not affecting) Agilent’s bottom-line are worth paying attention to. Regardless of the particular earning numbers themselves, Agilent is an excellent value and very diverse company that should produce consistent returns for its investors for years to come.

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Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Thermo Fisher Scientific. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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