Electronic Equipment Stocks to Consider Buying
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you are seeking exposure to the electronic equipment industry, there are several factors you should look at. First, consider the segments and geographical exposure. If you are bullish on life sciences over tech, you might want to consider preferentially backing their suppliers (unless, you want to hedge, or limit, your risks). Second, look at how successful R&D has been in driving free cash flow or whether it is driving growth yet to be factored into the stock prices. With these considerations in mind, I review three electronic equipment producers below.
Why The Street is Bullish on Agilent Technologies (NYSE: A)
Agilent is a company that provides measurement solutions for the communications, life sciences, chemical, and electronics analysis industries. If you go to their corporate website, you can get a better sense of the type of devices they sell: nuclear magnetic resonance instruments, x-ray crystallography, targeted protein engineering kits, genomic bioanalyzers, etc. It has a leading market share in most of its markets, and market share has grown in the high-end and mainstream oscilloscope markets. Seven of 13 analysts rate the stock a "buy," and the others rate it a "strong buy."
Why the optimism? The electronic equipment producer is forecasted for 21.3% annual EPS growth over the next five years, which is 1,620 bps greater than what is forecasted for the industry. Although free cash flow has started to plateau at $1 billion, it is up substantially from the late 2009 trough ($281 million) and where it stood ($800 million) between 2005 to 2009 on a TTM-basis. At a respective 11.7x and 11.2x past and forward earnings and a FCF yield of 7.8%, the company is quite cheap compared to historical levels. Excluding outliers, the average PE multiple over the past five years is easily over 15-16x. Needless to say, if Agilent can grow at anywhere the rate it is expected to and expand multiples somewhat closer to historic levesl, it will outperform the market.
Over the past 12 months, Agilent has gained 12.6% in value, but since just February, the stock is down around 10%. This is reflective of several misses, but I believe it is overblown. The decision to purchase wireless test systems from a Spanish company after acquiring Dako for $2.2 billion will expand greater exposure to high-growth markets. Yet this accretive takeover activity failed to drive up the stock price and, in my view, is a testament to the myopic outlook of the market at times.
There are alternatives to Agilent that are worth considering. Danaher and Harvard Bioscience specialize more in the medical & life sciences categories. The former trades at a respective 17.2x and 15.4x past and forward earnings versus corresponding figures of 65.7x and 14.1x for Harvard Bioscience.
There are several reasons to be optimistic about Danaher. The company has excellent exposure to emerging markets, which have driven double-digit growth rates. Danaher Business System ("DBS") has been the main driver of cash flow growth, which has grown 42% y-o-y. Moreover, I am particularly happy about the company's limited downside. In an environment full of macro pressures, management delivered strong organic momentum and made $500 million worth of new acquisitions. $1 billion in capital has been deployed on 10 targets. Since 2Q07, R&D has gone up 62.2% to $1.13 billion while diluted EPS and free cash flow have surged 83.2% and 106.4%, respectively.
There are also several reasons to be optimistic about Harvard Bioscience. It is forecasted for 25% annual EPS growth over the next five years. Assuming expectations are met, 2016 EPS would come out to $0.55. At a multiple of 15x, this translates to a future stock value of $8.25. Discounting backwards by 10% yields a present value of $5.12, a 30% premium to the current market assessment. Although return on invested capital is more than 180 bps better than the industry average, it is still extremely low at 3.9%. Fortunately, the company has been very aggressive on R&D - increasing it 73.3% over the last five years. A good ROIC won't be soon for some time until this innovation hits the market. As demonstrated through the present value analysis, this growth isn't being fully factored into the stock price.
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