Is This Diversified Tech Company a Buy?
Rupert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
After divesting from Hewett-Packard in 1999, Agilent Technologies (NYSE: A) has rapidly expanded its reach and now has clients across the communications, life sciences, and chemical analysis sectors. The company manufacturers a wide variety of products including DNA microarrays, nuclear magnetic resonance, and vector network analysers. The products are often unique to individual customers, generating a strong bond between the company and its customers as only Agilent's engineers are trained to service the individual products.
Agilent competes in the electronic measurement business. Its chief competitors include Thermo Fisher Scientific (NYSE: TMO) and Life Technologies (NASDAQ: LIFE). Thermo Fisher Scientific is specifically geared towards biotech, pharmeceuticals and the general healthcare market, while Life Technologies primarily provides life sciences products. Life Technologies has a rich patent portfolio, which lends it significant advantages; however, it is playing catch up in the international marketplace as it is only now expanding its operations in the BRIC countries. Thermo Fisher Scientific on the other hand has a much wider global reach, although over the last couple of years it has struggled to achieve significant income growth, despite increasing sales.
Electronic measurement is a very difficult market to enter due to the highly skilled labor that is needed. Agilent has the pick of the crop of engineers and researchers with experience in electronic measurement, as it is the market leader in many of the core categories associated with it. The company spent $700 million over the last twelve months (just over 10% of revenue) on research & development, reinforcing its competitive image.
Agilent has quickly expanded into the developing countries, taking advantage of the rapid growth seen there. In excess of 30% of its revenues come from Asia, notably India and China, while over 70% of its revenues come from a wider international consumer base. From an international standpoint, Agilent is the market leader and has a solid head start over its competition. However, this large exposure in fast growing economies is also very risky due to the foreign exchange fluctuations seen in many of these countries.
Over the last couple of years, Agilent has managed to cut costs and increase its profit margins. Its trailing earnings of $2.88 per share is a vast improvement over the $0.09 loss it reported in 2009 and significantly better than the $1.94 recorded in 2010. Its higher earnings are due to the company streamlining the supply chain and its divesture of poorly performing assets along with a variety of other cost cutting measures. This has also allowed the company to become more cost competitive, leaving it less exposed to global economic conditions and price shocks.
Agilent closed for the weekend at $44.23, just 7.3% off its 52-week high, equating to a market capitalization of $15.26 billion. The firm's share price has fluctuated between $35.32 and $47.47 over the last year.
As already mentioned it has trailing earnings of $2.88, leading to a P/E ratio of 15.36. This is significantly below the industry average of 25.6, and is also lower than the market average of 20-25, indicating the stock is trading at a discount. Agilent's earnings are expected to rise to $3.19 a share by 2014, leading to a forward P/E of 13.87. Over the last three years, the company's revenue has grown by an average of ~16% year-on-year, while its net income has gone from negative to $1.013 billion, more than doubling over the past two years.
A quick look at Agilent's books reveals some impressive data. The company has $2.519 billion in cash, more than enough to cover its short term debt of $250 million and its long term debt of $2.106 billion. It also has $2.91 billion in net working capital (current assets-current liabilities), giving it ample operating liquidity, and its NWC ratio of 2.53 is indicative of its financial strength, although it could also suggest an under-utilization of its asset base.
The company's cash flows show that $221 million was spent on capital expenditures over the last year, and capex has been increasing since 2010, when it was at $121 million. It also generated strong free cash flows of $1.064 billion over the same period.
Agilent Technologies has a trailing EBITDA of $1.351 million, giving us its trading multiple (market cap/EBITDA) of 11.30. We can find the enterprise value by adding the market cap of $15.26 billion with the total debt of $2.356 billion and then subtracting the cash of $2.519 billion. This gives us an EV of $15.097 billion, and consequently an EV/EBITDA of 11.17.
An average of these EV/EBITDA's gives a value of 12.065, suggesting Agilent has a ~8% upside potential.
Agilent faces some challenges in the near future, most notably, protecting its intellectual property, while innovative to keep up with fast technological strides. The company also will have to confront the issue of most of its cash being abroad, as it will have to pay taxes on it if it uses it to invest in its US operations. Overall, due to strong expected revenue and sales growth of ~6% over the next few years, I believe Agilent is a slight buy.
Notes: Agilent offers a small dividend of 1.02%. Additionally, the consensus on Wall Street is that Agilent will outperform the market.
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Rupert Nicholson might initiate a position in Agilent Technologies by Tuesday. The Motley Fool has no position in any of the stocks mentioned. 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!