Agilent: Making A Move To Ignite Some Growth
Contributor since 2011 / 26034 Followers
Summary:
- Agilent Technologies shares looked appealing in 2023, trading at a reasonable 21 times forward earnings multiple.
- The company saw a tough year in 2024, with soft operating performance and lowered guidance, despite a strategic bolt-on deal with BIOVECTRA.
- Shares have recovered from lows of $100 to highs of $155, but uncertainty remains as the company struggles with sluggish performance.
- With a softer 2024 performance seen (again) the company has resorted to a strategic bolt-on deal with BIOVECTRA.
Fanliso
In May of last year, I believed that shares of Agilent Technologies, Inc. (NYSE:A) were starting to look appealing. Shares have traditionally traded at a premium, amidst a solid positioning and continued M&A efforts. Following a sluggish share price, shares traded at a very reasonable 21 times forward earnings multiple last year, which looked quite compelling.
Forwarding a little over a year in time, Agilent has seen a tough year, all while shares have recovered a bit. This has worsened the risk-return profile in my view, even as the company made a nice strategic bolt-on deal here.
Nonetheless, this makes me quite cautious here, as execution has been sluggish for quite some time now.
A Measurement Conglomerate
Going back to 2020, Agilent Technologies was a $5.3 billion scientific measurement business, posting operating margins in the lower twenties. The company did see a small increase in sales, not being a major beneficiary of the pandemic. Nearly half of sales were generated from the Life Science & Applied Markets Group, a business which generates revenues from instrumentation and information services, used in analytical laboratory settings.
The Agilent Cross Lab was responsible for about a third of sales, with the Diagnostic and Genomics business being responsible for a fifth of sales, a business with long-term rosy prospects.
In the fall of 2022, the company posted its fiscal 2022 results, a year in which revenues were up 8% to $6.8 billion, with adjusted earnings per share up as much as 20% to $5.22 per share, equal to $1.5 billion in dollar terms. This was coincidentally equal to net debt, being very modest.
For 2023, the company guided for a modest increase in sales to $6.9-$7.0 billion, with earnings set to rise further to $5.65 per share. After a solid first quarter, the company hiked the full year sales guidance to $7.03-$7.10 billion, with earnings seen up to $5.65-$5.70 per share. This was reversed to $6.93-$7.03 billion in sales, and earnings of $5.60-$5.65 per share respectively, upon the release of the second quarter results. Trading down to $120, shares traded at a reasonable 21 times multiple, all while net debt of $1.4 billion was quite modest.
Amidst all this, I was happy to start buying a dip around the $110 mark, as I have bought small with shares eventually falling to a low of $100 per share in the fall of last year.
Recovering
Following a strong recovery late in 2023, shares started 2024 at around $140 per share. Shares even hit a high of around $155 per share in May, now having fallen back to the $130 mark here.
Forwarding to November of last year, it became evident that the company posted results which fell short compared to the original guidance. Revenues were reported pretty flat at $6.83 billion, with non-GAAP earnings up 4% to $5.44 per share. This was all a bit soft compared to the original outlook, but the promising news was that net debt fell down to $1.1 billion.
The fiscal 2024 guidance was quite soft and non-inspiring, with sales seen flattish between $6.71 and $6.81 billion, with earnings seen flattish between $5.44 and $5.55 per share. With the company suffering from soft demand in the end markets of its clients, the company cut the full year guidance.
This happened alongside the release of the second quarter results in May, with full year sales now seen down to $6.42-$6.50 billion, with adjusted earnings seen between $5.15 and $5.25 per share. The only silver lining is that net debt was down further, to nearly three-quarters of a billion.
With 293 million shares now trading at $130, the equity of Agilent is valued at $38.1 billion, for a roughly $38.8 billion enterprise valuation. This values the business at around 6 times sales and amidst a rising stock and falling earnings, valuation multiples have risen to 25 times. This furthermore comes as the fundamental performance has been uninspiring for quite a few years here.
A Deal
Amidst a complete lackluster operating performance, Agilent has resorted to a bolt-on deal in July to ignite some optimism. The company has reached a $925 million deal to acquire BIOVECTRA, a specialized contract development and manufacturing organization.
The company produces biologics and highly potent active pharmaceutical ingredients for targeted therapeutics. This is clearly a strategic growth initiative, as BIOVECTRA will add some $113 million in revenues based on its 2023 performance. This suggests that a premium 8 times sales multiple has been paid, adding nearly 2% to pro forma sales.
The deal is set to be dilutive to the tune of $0.05 per share, which suggests about $15 million dilution in dollar terms. This implies that the business is likely modestly profitable, with the added interest cost from the purchase being responsible for the dilution.
The accompanied deal presentation revealed that sales were set to grow to $130 million in 2024, suggesting that the business grows by around 15% per annum. All this adds about 30 basis points to the organic growth profile of the business. This should drive earnings accretion, as seen in year two post-closing.
What Now?
The truth is that I am turning more cautious here. Since I initiated a position a year ago, shares have risen some 20%, while the performance of the business has fallen some 5% short compared to expectations. The lack of operating performance is disappointing, with softer performance taking place for quite a while now, all while shares have recovered a bit.
Having initiated a modest position last year, I wished that I had sold out at the $150 mark earlier this year, as the original 2024 outlook was not too impressive already. Hence, I find myself in a tough spot. I would like to take profits here, but shares have recently seen a 15% correction already, as I missed the opportunity to cash in earlier this spring. Hence, I am performing a balancing act, holding a modest position here, while I would like to use moves higher to take profits here.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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