• Agilent Technologies, a major player in life sciences and chemical analysis, faces cyclical and structural challenges but shows potential for growth in FY 2025.
• Despite a strong global presence and competitive advantages, Agilent’s stock offers limited upside at current prices, leading to a “hold” rating.
• Revenue decline is driven by downturns in China and reduced pharmaceutical spending, but management expects a turnaround in FY 2025.
• Valuation concerns and risks include increased competition and internal re-organization, making the stock less attractive for a “buy” rating.

Agilent Technologies (NYSE:A) is one of the largest global life science test and measurement equipment and service market players. Agilent offers a broad spectrum, such as liquid chromatography (LC), mass spectrometry (MS), and other research and analytical equipment, as well as related consumables and services, which are crucial for pharmaceutics, biotech, academia, government, and various other industries. Recently, the company has been going through some challenges due to cyclical and geopolitical factors, some are cyclical, while others are structural. I believe Agilent will return to a growth trajectory in the next few years. However, at the current price, Agilent’s stock offers limited upside. Therefore, I am initiating coverage with a “hold” rating.

Agilent’s business

Agilent was spun off from Hewlett-Packard in 1999 as a separate entity focused on the test and measurement market. Since then, the company has grown both organically and through acquisitions. Over the years, Agilent has not only expanded its product offering but also gained market share in most of its end markets due to the company’s strong focus on R&D. Agilent spent almost 30% of its revenue on R&D expenses. In comparison, Waters Corp. (WAT) only spent about 6%, and Thermo Fisher (TMO) spent just about 3% of its revenue on R&D. In absolute dollar terms, Agilent’s R&D expense is multiple times larger than Waters Corp, but much less than Thermo Fisher.

According to Agilent’s most recent earnings release, the company has three business segments: the life sciences and applied markets [LSAG] segment, the diagnostics and genomics [DGG] segment, and the Agilent CrossLab [ACG] segment. LSAG is Agilent’s most important segment and accounted for 50% of Agilent’s revenue for FY 2024. Regarding geographic exposure, Agilent’s largest market is the Americas, followed by Asia Pacific and Europe.

In terms of revenue by end market, the pharmaceutical end market, which accounted for more than a third of Agilent’s revenue, is the largest end market for the company. Chemicals and Materials, Diagnostic & Clinical are the next big two end market for Agilent, which account for 22% and 15% of Agilent’s revenue respectively.

While Agilent breaks down its end market into six categories, they are all related to life science, which is how I think about Agilent’s business. Prior to COVID, the global life science market was a great market with a GDP above the growth rate, according to Agilent’s 2019 Investor Day presentation.

Agilent’s past growth drivers

The past growth of the global life sciences market has been mostly driven by increasing R&D spending as well as the increasing outsourcing for the pharmaceutical and biotechnology companies. Additionally, the global need for test and measurement equipment has also benefited from growing demand from the government, academia, and other research institutions in areas such as food safety, environmental protection, and semiconductor self-sufficiency. Agilent has been a primary beneficiary of the strong growth in the global R&D demand, particularly in China. In fact, Agilent’s corporate website has dedicated a special report detailing Agilent’s history with China called “Agilent and China.” According to the report, Agilent can trace its operation in China all the way back to 1981, when “HP opened its Representative Office in China. From the beginning, HP and then Agilent have made it clear that they are in China for the long term, to support both China’s development and that of its own business.”

Agilent’s long history of operation in China gives the company deep local knowledge and a significant competitive advantage in China, which grew at a CAGR of 15% from 2015 to 2020 for Agilent. Coming out of COVID, Agilent’s China business initially looked like it would continue to boom. Agilent’s revenue in China grew 44% for Q4 of FY2022 and another 32% for Q2 of FY2023. However, Q2 of FY2023 was the last good quarter for Agilent in China.

Recent growth challenges

Starting from Q3 of FY2023, Agilent’s revenue has declined for 5 consecutive quarters, which is rare for Agilent.

Two factors have contributed mostly to Agilent’s revenue decline. Firstly, following years of rapid growth, Agilent’s operations in China experienced a steep downturn starting in the third quarter of FY 2023, when Agilent’s China revenue dropped 17% year-over-year. Since then, China has been a drag on Agilent’s results for 6 quarters. Secondly, the global pharmaceutical market, which accounts for roughly one-third of Agilent’s revenue, has decelerated spending. This slowdown is across the board from pharma biotech, CDMOs (Contract Development and Manufacturing Organizations), and CROs (Contract Research Organizations) following the industry’s boom during the COVID-19 pandemic.

While Agilent has suffered growth challenges during the past 6 quarters, there are positive signs of a potential turnaround for FY 2025. Management mentioned during the Q4 FY2024 call that “China was down only 3% and exceeded our expectations. We also booked our first China stimulus orders in October and anticipate much more in fiscal year 2025”. Management also expects “for the full year FY ’25, we’re expecting pharma to return to growth, so low to mid-single-digit growth there”. Looking ahead, it’s pretty clear that Agilent’s leadership has turned optimistic about returning to a growth trajectory for FY 2025 because both China and the spending by the pharmaceutical industry are on track to recover. Meanwhile, the company is committed to returning cash to shareholders through both dividends and share buybacks.

Valuation and risk discussion

After the recent drop, Agilent is trading at more than 24 times forward earnings based on Seeking Alpha’s analyst estimates. The sector median is 20.7 times per Seeking Alpha’s valuation metrics. Agilent is trading at a 20% premium over the sector median. While Agilent possesses some competitive advantages, it is not immune to risks, which I’ll discuss next. To be conservative, I am using the sector median P/E multiple on Agilent’s FY 2025 EPS estimate of $5.56, which gives me a price target of $116-120 per share.

In terms of risks, I am mostly concerned with two long-term risks. The first risk is the potential for increased competition, particularly in the pharmaceutical market, from Waters and Thermo Fisher. Agilent’s disproportionate exposure to the pharmaceutical and biotech market increases its cyclicality due to R&D spending cycles and regulatory cycles. The second risk is the impact of cultural change. Agilent has been going through a re-organization and reconstruction process. There has been a high level of senior leadership turnover during the past 12 months. Uncertainty and new leadership style are some of the most mentioned negative reviews on Glassdoor.

Conclusion

Agilent Technologies has been a major player in the life sciences and chemical analysis market, with a strong global presence and a comprehensive portfolio of product and service offerings. The company has been a great compounding machine prior to COVID due to its competitive advantages and China exposure. However, the company has faced multiple quarters of revenue decline as well as increased competition, geopolitical uncertainties, and challenges related to its re-organization efforts. While there are early signs of business recovery, at the current market price, Agilent’s stock is not cheap enough for a “buy” rating. Therefore, I am initiating coverage for Agilent with a “hold” rating.

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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• I reiterate a “Buy” rating on Agilent Technologies, Inc. with a one-year target price of $150 per share, driven by strategic growth and market recovery.
• Agilent’s acquisition of BIOVECTRA will enhance its CDMO business, focusing on oligonucleotides and CRISPR therapeutics, and expand service offerings in peptide synthesis.
• Agilent’s FY25 guidance includes 2.5%-3.5% core revenue growth and 5.8% adjusted EPS growth, aligned with market expectations and supported by segment-specific growth strategies.
• Key risks include the sluggish economy and geopolitical tensions in China, which represents a significant portion of Agilent’s revenue.

In my previous “Buy” thesis on Agilent Technologies, Inc. (NYSE:A) from August 2024, I highlighted their business transformation towards growth areas. Agilent delivered -0.3% core revenue growth in its fiscal Q4 and guides for 2.5%-3.5% core revenue growth for FY25, in line with the market expectations. I reiterate a “Buy” rating with a one-year target price of $150 per share.

Completed Acquisition Of BIOVECTRA

Agilent released its Q4 FY24 result on November 25^th after the market close, reporting 0.3% decline in core revenue and 3.5% growth in adjusted net income, as depicted in the chart below.

During Q4, Agilent completed the previously announced acquisition of BIOVECTRA for $925 million, a leading specialized contract development and manufacturing organization (CDMO). I believe the acquisition will help Agilent build their CMDO business in oligonucleotides and CRISPR therapeutics end-markets. During the earnings call, the management noted that the company will add additional high-growth therapeutic modalities like peptide synthesis to extend their service offerings.

My key takeaway from the quarter is the early signs of recovery in the pharmaceutical market. Agilent’s pharma end-market declined by 1% during the quarter, with biopharma declining by mid-single-digit and small molecule growing by low-single-digit. During the earnings call, the management expressed strong confidence in a broader market recovery throughout 2025.

Outlook and Valuation

Agilent is guiding for 2.5%-3.5% core revenue growth and around 5.8% adjusted EPS growth for FY25, as detailed in the side below. The outlook is largely aligned with the market expectations.

I am considering the following factors for their future growth:

• Life Sciences and Applied Markets Group: The segment represents almost half of Agilent’s total revenue. During the earnings call, the management indicated that the segment will be a strategic focus in the near future. As the Fed has begun to cut interest rates, I anticipate the economic will start to normalize and the funding environment in the biopharma industry will gradually improve. As such, I anticipate the segment will grow by 5.5%, aligned with the overall growth in pharma and applied market. In the near term, I anticipate strong growth momentum in their analytical lab consumables, which grew at a mid-single-digit rate.
• Agilent CrossLab Group: The segment has exhibited consistent growth across major geographies except China, as noted during the earnings call. I believe Agilent has a strong CrossLab services team. I anticipate the segment will grow by 4% annually, comprising 5% growth in developed countries and 1% headwind from China.
• Diagnostics and Genomics Group: I anticipate the segment will grow by 5%, aligned with their recent performance.
• Adding the three segments together, I calculate Agilent will deliver 5% organic normalized revenue growth. In addition, I assume the company will allocate 6% of revenue toward M&A, contributing 1.5% growth to the topline.
• I continue to forecast 20bps annual margin expansion, driven by 10bps from gross profits and 10bps from reduction in SG&A expenses. I estimate the total operating expenses will grow by 6.2% annually, resulting in 20bps operating margin expansion.
• The cost of equity is calculated to be 11.9% assuming: risk-free rate 3.8%; beta 1.17; equity risk premium 7%.

I calculate the free cash flow from equity (FCFE) as follows:

Discounting all the future FCFE to the year-end of FY25, the one-year target price is calculated to be $150 per share, as per my estimates.

Key Risks

The Asia Pacific region represents more than 34% of Agilent’s total revenue, with China representing a significant portion of this market. In Q4, their China business declined by 3% year-over-year. During the earnings call, the management noted an increase in funnel sales activities in China. However, they decided to take a conservative approach on the timing of the market recovery. I think China will remain a key risk for Agilent in the near future due to the sluggish economy and escalating geopolitical tensions between the US and China.

End Note

I am encouraged by the signs of end-market recovery in 2025, which could potentially accelerate Agilent’s growth in the near future. I reiterate a “Buy” rating with a one-year target price of $150 per share.

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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• Agilent Technologies focuses on growing biopharma, PFAS testing, and advanced materials for semiconductors.
• Recent acquisitions and divestitures show mixed results, with potential for technological enhancement but concerns about fit in the portfolio.
• Despite challenges in the pharma market, Agilent’s diversified revenue streams and potential for growth in key areas make it a ‘Buy’ with a target price of $160 per share.

Agilent Technologies (NYSE:A) offers instruments, consumables, software and services to life sciences, diagnostics and applied chemical markets. Agilent has made significant efforts in transforming its business towards growth areas including biopharma, polyfluoroalkyl substances (PFAS) testing and advanced materials for semiconductor. I am initiating a ‘Buy’ rating with a one-year target price of $160 per share.

Growing Biopharma, PFAS & Advanced Materials

Agilent offers workflow solutions for extraction, screening, quantification, and reporting of PFAS in water samples. PFAS, also known as ‘Forever Chemicals’, have created significant water pollution over the past decades. In April 2024, the Biden-Harris Administration finalized the first-ever national drinking water standard to regulate PFAS. In addition, the Environmental Protection Agency (EPA) announced nearly $1 billion in newly available funding to implement PFAS testing and treatment in public water systems.

I view these newly developed regulations would be extremely positive to Agilent’s future growth, as their workflow solution is dedicated to PFAS testing and reporting. In Q3 FY24, their Environmental & Forensics segment grew by 4% in revenue, primarily driven by increasing PFAS testing workflows.

During a recent conference, the management indicated that FDA regulations for PFAS-free product might be forthcoming, potentially expanding the addressable market from water to food industry.

Agilent provides testing products for safety, quality, and compliance across the value chains of advanced materials including semiconductor industry. With increasing geopolitical tensions, China, U.S. and European countries are developing their domestic semiconductor fabs. Agilent’s products are well positioned to capture the semiconductor testing markets. In some regions, Agilent owns more than 50% of market share, which is quite remarkable. Due to the rapid growth of AI, EV and factory automation, I trust the overall semiconductor market will continue to expand quickly.

Lastly, Agilent serves global pharma and biotech companies with liquid chromatography (LC) systems, liquid chromatography mass spectrometry (LCMS), and other instruments. The beauty of the markets is the high proportion of consumable business, which can make Agilent’s business become more recurring.

In summary, I believe Agilent is well positioned in these high-growth areas.

Acquisition and Divestiture

Agilent has been very active in portfolio management, acquiring growth businesses and divesting non-core assets.

In FY23, they decided to exit Resolution Bioscience business within their diagnostics and genomics segment. Agilent purchased the business in 2021 for $695 million. Although I appreciate the company’s actions to divest this underperforming asset, it is evident that the acquisition did not meet expectations.

In July 2024, Agilent announced to acquire Sigsense, a startup that applies AI and power monitoring to optimize lab operations. It is a very small deal with no financial term disclosed. I view the small tuck-in deal as a strategic move to enhance Agilent’s technological capabilities.

In July 2024, Agilent acquired BIOVECTRA, a specialized contract development and manufacturing organization (CDMO) for $925 million. BIOVECTRA has the potential to strengthen Agilent’s portfolio, particularly in oligonucleotides and CRISPR therapeutics. However, the CDMO market is a capital-intensive business with many competitors in the market. I don’t think BIOVECTRA can fit well in Agilent’s existing portfolio. As such, I don’t favor this deal.

Overall, Agilent’s acquisition strategy is not quite impressive, in my view.

Recent Financial, Outlook & Valuation

Agilent released its Q3 result on August 21^st, reporting a 4.4% decline in core revenue, as depicted in the chart below.

The major challenge is their pharma business, which declined by 8% year-over-year. According to the recent financial reports from Thermo Fisher Scientific (TMO) and Danaher (DHR), the overall pharma and biotech markets continue to face capital constraints due to the current high-interest rates and weak private equity funding environment. However, both Thermo Fisher and Danaher anticipate the end-market will start to recover later this year or in FY25.

Agilent is guiding for 4.3%-5% decline in core revenue for FY24, as illustrated in the slide below.

For FY24’s growth, I am considering the following factors:

• Pharmaceutical and Biopharmaceutical: I forecast the market will decline by high-single-digit in FY24. It is unlikely for the end-markets to recover without an interest rate cut. While the Fed is more likely to cut the rate in September, it might take several months for the private equity market to recover.
• Chemicals and Advanced Materials: Agilent delivered a strong result in the U.S. market, but this was offset by weak China operations. I anticipate the segment will decline by 5% in FY24.
• Diagnostics and Clinical: The mass spectrometry market has been growing at mid-single digit in the past. Due to the current weak macro, I anticipate their growth rate will fall below the historical average.
• Environmental and Forensics: As discussed previously, I foresee PFAS testing will drive Agilent’s growth in the near future. I estimate the segment will grow by 4%.
• Others: I assume Food and Academia/Government will decline by 5% and 10%, respectively.

Summing these components, I calculate Agilent’s revenue will decline by 4.6% in FY24.

I estimate the normalized organic revenue will grow by 5% from FY25 onwards, assuming the following segment growth rates: Pharmaceutical and Biopharmaceutical 6%; Chemicals and Advanced Materials 5%; Diagnostics and Clinical 5%; Environmental and Forensics 5%; Food 3%: Academia/Government 3%.

Additionally, I forecast Agilent will allocate 5% of total revenue in acquisitions, resulting in 130bps growth to the topline.

I model 20bps annual margin expansion, driven by 10bps from new product launches with higher pricing; 10bps operating leverage from SG&A due to increasing mix towards direct-sales model.

The DCF summary can be found below:

I calculate the free cash flow from equity as follows:

The cost of equity is calculated to be 12% assuming: risk-free rate 3.8% ((US 10Y Treasury)); beta 1.17 (SA); equity risk premium 7%.

The one-year price target is calculated to be $160 per share, as per my estimates.

Key Risks

• China: China is a crucial market for Agilent, with the Asia Pacific region accounting for more than 34% of total revenue. In Q3 FY24, China business declined by 11% year-over-year, due to the weak growth in services and consumables. In my view, the biopharma industry in China is unlikely to recover anytime soon, considering the weak economy in China.
• Diagnostics and Genomics Competition: In the Diagnostics and Genomics market, Agilent is facing strong competitions from Abbott (ABT), Thermo Fisher, Danaher and Roche (OTCQX:RHHBY). These competitors are quite strong in terms of R&D and sales team. Agilent may need to allocate more resources in the Diagnostics and Genomics business, either through internal development or external acquisitions.
• CDMO: Agilent has some business exposure in contract development and manufacturing organizations. As discussed previously, I don’t think CDMO fits in Agilent’s overall instruments + consumbales + software and service model. I would be concerned if the company continues to acquire CDMO players.

End Note

While Agilent is not a fast-growing company, they do have several promising growth areas, including biopharma, PFAS testing and advanced materials for semiconductors. The stock price is undervalued; therefore, I am initiating a ‘Buy’ rating with a one-year target price of $160 per share.

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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• 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.

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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• Agilent’s may be an underappreciated winner with Alnylam’s recent clinical success, as manufacturing Amvuttra could generate more than $500M in revenue in the coming 5-7 years that isn’t in models.
• Sharp cutbacks in capex spending across academic labs, biopharma, chemical, food/beverage, and material science companies has hit Agilent’s revenue hard this year, but the capex cycle will recover.
• Despite current challenges, Agilent’s long-term leverage to growth in areas like advanced materials, biopharma, and genomics makes it worth consideration.
• Life sciences tools companies almost never get conventionally cheap without a disaster, but there’s still a GARP argument for Agilent shares toward $150.

If you follow enough stocks long enough, your brain starts to resemble a “crazy wall” (or, more nicely, an “investigation board”; imagine the TV trope of pictures, notes, and so on connected by strings), but sometimes that be helpful.

Writing about Alnylam (ALNY) and its very successful HELIOS-B study the other day, my mind turned to other companies that could be impacted, and that brings me to Agilent (NYSE:A). Not only is a piece of Alnylam’s blockbuster-to-be Amvuttra potentially worth well over $500M/year in the not-so-distant future, it’s been a while since I’ve updated my thoughts on this life sciences and material sciences company.

Up more than 20% since my last article (though down more than 10% from its highs), my “different is better” thesis on Agilent seems to be working out, as the company’s shares have outperformed comparables like Bruker (BRKR), Danaher (DHR), Thermo (TMO), and Waters (WAT) and may be in a relatively better position to navigate a very challenging period in the life sciences tools space. Not exactly a bargain, I do think there is still a credible argument to make in Agilent’s favor.

Let The Sun Shine

As I said in the open, my thoughts turned to Agilent when I saw the HELIOS-B results, as Agilent has long been Alnylam’s manufacturing partner for its oligonucleotides. Based on trial results that were effectively as good as anybody good reasonably expect (and better than base-case expectations), Amvuttra looks positioned to become a major player in the ATTR-CM amyloidosis market, and that will provide a boost to Agilent’s Nucleic Acid Solutions business.

Agilent’s Nucleic Acid Solutions business is still a relatively small one for Agilent (around 4% to 5% of revenue), but it has benefitted from not only Alnylam’s success (including five commercialized compounds), but also growing clinical interest in similar approaches (RNAi, antisense, and so on) and next-gen sequencing for indications like oncology.

I have never seen Agilent or Alnylam discuss their manufacturing relationship, but based on knowing a little bit about the business, I would estimate that Agilent sees about 7.5% to 10% of the revenue that Alnylam’s compounds produce. With approval in ATTR-CM Amvuttra’s revenue is likely to scale up quickly to over $5B and a peak in the $8B to $10B area is not ludicrous to consider. With that, Agilent may be looking at an incremental $500M in revenue over the next few years that I don’t believe was in many analyst models.

Based on management discussions, they can handle about $450M in revenue today, with new capacity coming online in FY’26 and FY’27 that will double that. Given what could be a fast ramp for Amvuttra, Agilent may have to accelerate those plans, and I’d note that Alnylam has other promising products in its pipeline, including a drug for hypertension (zilebesiran) that could generate multiple billions of dollars in revenue (or multiple hundreds of millions of dollars for Agilent) if later-stage studies are successful.

Meanwhile, It’s Still Raining …

As enthusiastic as I may be about the Amvuttra revenue opportunity, the reality is that present conditions remain challenging for Agilent.

Revenue was down more than 7% in the last quarter, with 13% contraction in Life Sciences and Applied Markets Group (or LSAG) on weak spending on instruments (liquid chromatography, mass spec, and cell analysis, with the latter down “mid-20’s”). Applied CrossLab Group revenue was better, up 5% on double-digit growth in service contracts, but not surprisingly new instrument installation revenue was weak. Diagnostics and Genomics Group revenue was down 8% on broad weakness, including a low-teens contraction in NAS as clinical programs were pushed out, but there was some growth in pathology and cancer diagnostics, and PFAS testing remains a growth opportunity.

Management did note that orders turned positive for the first time in seven quarters, but conditions remain tough and they also cut revenue guidance by about 5% at the midpoint, with much of the damage coming from ongoing weakness in the pharma and China end-markets.

Looking at other life sciences tools companies, Danaher reported a 17% decline in Biotechnology revenue for calendar Q1’24 and a 3% decline in Life Sciences, while Thermo saw a 3% decline in sales, and Waters saw a 9% decline. Bruker managed 2% organic growth, but does admittedly have a different set of drivers in play. Said differently, even with Agilent’s more cyclical business mix (chemical, material sciences, and food/beverage companies account for almost as much revenue as biopharma customers), the company isn’t doing that much worse than its peers.

… But It Won’t Rain All The Time

I’m also still bullish on the longer-term opportunity at Agilent. Based on company commentaries during the last earnings cycle, it seems like biopharma capex budget corrections are bottoming out and should start growing again in 2025. Likewise, while I don’t think academic/government research budgets are going to come roaring back, I don’t see them getting much worse. I expect chemical company capex will likely be softer over the next year or so, and probably so too for food/beverage, but semiconductor and electronics markets are rebounding, and there’s still strong demand in areas like battery technology.

Thinking about this thematically, Agilent is still leveraged to strong trends like the “greening” of the chemical industry – harnessing R&D to find compounds that have a better overall environmental footprint and/or replace key performance materials that are for whatever reason problematic (like removing rare earth elements from magnets). I also see opportunities for Agilent to leverage its capabilities in areas like mass spec into the growing market for MS-driven clinical diagnostics (though I think Bruker is the better play on that theme).

I’m also still bullish on the long-term leverage Agilent has to genomics, sequencing, and structural chemistry. Cell analysis and structural chemistry are still in their infancy insofar as driving drug development, and there is a long runway for growth in areas like next-gen sequencing (for research and diagnostics) and new therapies like RNA interference (Alnylam’s core technology), messenger RNA (the core technology at BioNTech (BNTX), antisense (Ionis (IONS), gene therapies, and other newer approaches like gene and exon editing. To that end, I’d point out that Roche (OTCQX:RHHBY) has signed six partnership deals over the last four years with biotechs targeting RNA in one form or another, and they’re not the only Big Pharma pursuing this area.

The Outlook

Although Agilent did about as I expected in FY’23, that hasn’t been the case in FY’24 as the sharp downturn in biopharma capex, not to mention weaker trends in the chemical industry, government/academic labs, and food/beverage have hit the company harder than I expected.

I’m expecting revenue to decline 5% or 6% this year, but rebound about 7% next year and grow around 8% for a few years after that. Not surprisingly, I DO have Amvuttra-driven revenue in my Agilent model, though there are certainly uncertainties as to the timing and magnitude of the ramp here (the drug isn’t even approved yet for ATTR-CM and won’t be launched until 2025). Long term, I’m still looking for around 5% to 6% revenue growth from Agilent and that’s without considering any meaningful M&A.

Margins seem to be holding up okay for now, and I think Agilent will get by with a slight decline in EBITDA margin from FY’23 and a point or so decline in operating margin before rebounding in FY’25 and climbing toward 30% (operating margin) and the low/mid-30%’s (EBITDA). I still expect free cash flow production to scale up with revenue growth, reaching the mid-20%’s over the next three to five years and then slowly climbing toward the high-20%’s over time, driving high single-digit (around 8%) annualized FCF growth.

The bad news regarding Agilent’s relative outperformance is that a stock that wasn’t all that cheap to begin with really isn’t meaningfully cheaper now. I do still see a decent long-term return on a discounted cash flow basis (mid-to-high single-digits), and I can still argue for a slightly higher share price on the basis of growth, margin, and return-driven EV/revenue and EV/EBITDA (including an 20x forward EBITDA multiple).

The Bottom Line

Agilent isn’t a classic bargain and there are plenty of valuation-oriented investors who still won’t touch it at this level. If you’re more of the “growth at a reasonable price” type, though, I do think this recent pullback could be an okay opportunity ahead of what should be a better operating environment in calendar 2025.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of alny, RHHBY either through stock ownership, options, or other derivatives. 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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Agilent Hit By Cyclical Headwinds, But The Growth Story Remains Intact Long Term appeared first on Up2info.com.

• Agilent Technologies is a major player in the diagnostics and research industry, with a focus on laboratory-focused solutions.
• The company has shown resilience and strong growth potential, with a positive outlook for future earnings and long-term growth.
• However, there are concerns about the company’s valuation and potential market volatility, as well as geopolitical risks in China.

Introduction

One of my favorite industries is the diagnostics & research industry, part of the healthcare sector. In this sector, I own the Danaher Corporation (DHR). I have bought Thermo Fisher Scientific (TMO) for family accounts and have IDEXX Laboratories (IDXX) on my watchlist.

In this case, I listed the biggest, second-biggest-and fourth-biggest players in this industry, respectively.

The third-biggest player is Agilent Technologies (NYSE:A), which I started covering last year in July using the title “Agilent Technologies – A Wealth Compounder 30% Below Its Highs.”

Interestingly enough, the stock has returned 29% since then.

My most recent article on the company was written on December 23, when I discussed its fantastic 4Q23 earnings:

After a tough start to the year, Agilent Technologies emerges as a standout performer in the healthcare sector.

[…] The company’s resilience in a challenging market, strategic dividend hikes, and an optimistic outlook for 2024 and beyond underscore its long-term potential.

While I’m cautious about market risks after the recent rally, the prospect of sustained growth, especially in the service business, makes Agilent a stock worth watching for future opportunities.

After two tough post-pandemic years, the company is back on track. Over the past ten years, the A ticker has returned 326%, beating the S&P 500 by roughly 90 points.

Since November 2003, the stock has returned 11.3% annually.

As the company is expected to report its earnings on May 29, I’m going to use this opportunity to assess how attractive the company is and what we need to look for when management presents us with a wave of new data and comments.

So, let’s get to it!

A Laboratory-Focused Innovator

Founded in 1999, Agilent has become one of the largest companies in its industry, as I just briefly mentioned.

The company has become a leader in life sciences, diagnostics, and applied chemical markets, where it focuses on “application-focused solutions” tailored to the entire workflow in laboratories.

Essentially, this includes advanced instruments, software, consumables, and a whole range of services.

All of these operations are offered through three major segments:

• Life Sciences and Applied Markets: This segment includes instruments, consumables, and software to allow customers to identify, quantify, and analyze the physical and biological properties of substances and products. Using the overview below, we see this segment accounted for 51% of revenues in 1Q24.
• Diagnostics and Genomics: This segment provides active pharmaceutical ingredients (APIs) for oligo-based therapeutics and a wide range of solutions like reagents, instruments, software, and consumables.
• Agilent Crosslab: This segment focuses on making laboratory workflows more effective.

To use simpler terms, Agilent provides essential products and services for laboratory research, which it supports using very efficient operations through its order fulfillment and supply chain organization (“OFS”).

At the end of last year, the company was named “global lighthouse” by the World Economic Forum for its manufacturing innovations (emphasis added).

The recognition showcases Agilent’s Waldbronn facility as a model of smart manufacturing enabled by Fourth Industrial Revolution (4IR) technologies, such as artificial intelligence and machine learning, robotics, data analytics, and the industrial internet of things (IIoT).

Only 153 manufacturing facilities worldwide have received the Lighthouse distinction from WEF, and Agilent is the sole analytical and clinical laboratory technology company among them. It is the second Agilent facility to be named a Lighthouse, after Agilent’s Singapore site in 2022.

While I am not a huge fan of the World Economic Forum, I have followed their work on supply chains for many years and believe this recognition is meaningful.

Adding to that, Agilent is highly diversified.

As the charts above show, it has significant exposure in Europe and APAC nations. It is also far less dependent on healthcare than one might expect due to its focus on laboratories.

Using the data below, we see a big part of the company’s customers operate in non-healthcare sectors that require advanced laboratories, including chemicals and food-related customers.

Moreover, according to Grand View Research, the market for laboratory supplies is expected to rise by 8.5% annually through 2030, with roughly a third of it consisting of consumables.

Even better, Agilent is in a great spot to benefit from outperforming growth in key markets, including Asia.

The market is expected to grow steadily in the coming years owing to the continuous and stable supply of laboratory equipment. The Asia Pacific region accounted for the majority of growth during this period, owing to increased clinical diagnostic testing adoption, increased disposable income, a surge in research, development, and innovation activities, and increased disease prevention and early detection awareness. – Grand View Research

Improving Growth & What To Expect Going Into Earnings

You may already have seen it in the charts I used to show the company’s sector/industry breakdowns, but the company is still stuck in a volatile business environment.

In the first quarter, the company noted that the chemical and advanced materials market decreased by 4% after a 14% growth rate in the previous year.

Advanced materials, however, showed resilience with a low single-digit year-on-year improvement and positive quarter-over-quarter growth despite challenging comparisons.

Meanwhile, the academia and government market grew by 2%, which indicates stable academic funding and lab activity. In general, I have heard similar comments from the company’s peers, who indicate that this market segment remains extremely strong – likely due to less impact from elevated rates on funding.

Moving over to the diagnostics and clinical market, this segment saw a 5% decline, with pathology growth offset by challenges in various areas, including genomics, cell analysis, and liquid chromatography.

The environmental and forensics market saw a 1% decline, driven by new global regulations for PFAS testing, with China and the U.S. offsetting growth in Europe.

Going into its second-quarter earnings, the company hasn’t set the bar very high, as it expects revenue to come in between $1.56 and $1.59 billion. That’s a decline between 9.1% and 7.4% on a reported basis.

Analysts expect 2Q24 EPS to come in at $1.19. This is based on seven estimates, with one down revision over the past four weeks.

The company has beaten EPS expectations for three consecutive quarters.

Going into earnings, I care a lot about what the company has to say about its future. As obvious as that may sound, Agilent and its peers are in a very volatile post-pandemic environment.

The market needs visibility, as we want to know how much longer demand will be sluggish. Using the chart above, analysts expect stronger earnings momentum going into the end of this fiscal year.

This is expected to last.

Using FactSet data from the chart below, analysts expect 1% EPS growth in 2024, potentially followed by 11% and 10% EPS growth in 2025 and 2026, respectively. Please note that I’ll show this chart again in the valuation part of this article.

This makes sense, as the company added some color to its longer-term growth expectations during the recent TD Cowen Annual Health Care Conference.

During this conference, the company started by mentioning the CEO transition from Mike McMullen, who was with Agilent for 40 years, to Padraig McDonnell, who has been with the company for 26 years.

He has a very customer-centric approach and growth mindset, having successfully grown the CrossLab business’ operating profit margin from 25% to 30%.

Speaking of growth, the company used the conference to explain that it keeps a very positive long-term outlook, expecting between 5% and 7% annual organic growth and between 50 and 100 basis points of margin improvements.

Unsurprisingly (given what we discussed so far), the company sees opportunities in biotech and wants to increasingly focus on recurring revenue, which is something all of its peers are doing as well.

Moreover, and this is something to keep in mind as we await the 2Q24 earnings call, China is turning out to be stronger than expected. In 1Q24, it saw 9% contraction. It expected a revenue contraction in the mid-20s.

This was driven by growth in applied markets, including chemicals and advanced materials, supported by semiconductors and lithium-ion batteries – two major growth markets in Asia.

In general, while China is suffering more from post-pandemic weakness than other major nations, the South China Morning Post reports that underlying strength remains solid:

Despite its slump from a baseline kept high by the pandemic, China’s diagnostics market is still expected to beat the global industry in growth, as it plays an important role in disease prevention and treatment for a large and rapidly ageing population.

“In 2023, the industry gradually returned to normal development, and the demand for conventional tests that had been previously affected is set to grow rapidly,” said Zhu Yaoyi, a professor and secretary general of the association’s medical laboratory sciences branch, at an event commemorating the report’s release. – South China Morning Post

That said, one thing to keep in mind is the Biosecure Act and rising geopolitical tensions that could turn into risks for Agilent.

The bill, introduced in January, seeks to stop firms that receive federal funds from using select Chinese service companies: the genomics firms BGI, MGI, and Complete Genomics; and WuXi AppTec, a contract drug manufacturer with clients such as Eli Lilly and Company. The bill’s latest iteration also adds WuXi AppTec’s sister company, WuXi Biologics. – C&EN

The good news is that Agilent is investing in local capabilities, including new facilities to meet “country-of-origin” requirements to deal with new laws of nations protecting their own markets.

Valuation

Using the chart below again, the company is trading at a blended P/E ratio of 27.9x, which is well above its normalized P/E ratio of 22.3x.

The obvious question is if this is warranted.

Personally, I have become a bit more careful, yet far from bearish.

The biggest mistake investors in this space have made in recent years is focusing too much on the short-term. Because of a strong performance during the pandemic and slowing growth after the pandemic, a lot of stocks in this industry appeared to be expensive.

While Agilent is far from cheap, the market is expecting the company to return to its old habit of reporting double-digit annual EPS growth.

If the company is able to grow organic revenue by up to 7% per year on a consistent basis, I doubt investors will shy away from a 28x multiple.

A potential correction could be triggered if the company hints at more weakness in China or any of its major end markets. Given how fragile the recovery is, any signs of weakness could cause some selling.

That said, I do not anticipate corrections to last, as I expect Agilent to gradually work its way to new all-time highs, potentially returning to its old “habit” of returning north of 10% per year, which is likely if it combines 5-7% annual organic revenue growth with up to 100 basis points of margin improvements.

Takeaway

As discussed in prior articles, Agilent Technologies has proven itself as a resilient and innovative leader in the diagnostics and research industry, with a solid recovery after challenging post-pandemic years.

With a strong focus on strategic growth, diversified market exposure, and innovation in manufacturing, the company is well-positioned for sustained growth.

Moreover, despite the volatile business environment the company is facing, Agilent’s organic growth outlook and expected margin improvements highlight its long-term potential.

While the stock may face short-term fluctuations, especially with the upcoming earnings report, its historical performance and growth markets make it a compelling investment, which is why I stick to a Buy rating.

Pros & Cons

Pros:

• Strong Market Position: Agilent is a leader in life sciences, diagnostics, and applied chemical markets.
• Resilient Performance: The company has shown an impressive recovery last year – despite a challenging environment.
• Innovative Operations: Agilent’s use of AI, robotics, and data analytics sets it apart and provides opportunities for long-term growth.
• Growth Potential: Expected organic growth of 5-7% annually and margin improvements are great news for long-term shareholder returns.
• Global Reach: The company has significant exposure in Europe and APAC, with growth opportunities in non-healthcare sectors.

Cons:

• Valuation Concerns: The company is trading at a P/E ratio of 27.9x, which is well above its normalized P/E ratio of 22.3x. This means there’s little “room for error” when it reports its earnings.
• Market Volatility: The post-pandemic business environment remains unpredictable, with ongoing uncertainties.
• Geopolitical Risks: Rising tensions and new regulations, like the Biosecure Act, could impact Agilent’s operations in China.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of DHR either through stock ownership, options, or other derivatives. 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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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The post Is Agilent A Buy Before Earnings? Examining The Pros And Cons appeared first on Up2info.com.

• Agilent has reshuffled its portfolio and increased economic returns, but growth is expected to be sluggish, and the upside may be limited.
• The company provides life sciences, diagnostics, and applied chemicals products to various industries.
• Agilent is a quality company and has demonstrated strong financial performance, improving margins, and efficiency, but its valuation suggests limited upside potential.
• We initiate with a hold rating.

We initiate Agilent (NYSE:A) with a hold rating. The company has managed to reshuffle its portfolio and significantly increase its economic returns over the past decade. Revenue per share has also grown at a respectable 7.5% CAGR since the spinoff of Keysight Technologies and the disposal of its nuclear magnetic resonance business in 2014. However, with growth expected to be sluggish going forward, and a high FY24 PE of 27x, we believe the upside may be limited.

The company has all the traits of a quality company, with improving operating efficiency, increasing margins, a strong balance sheet, stable and improving earnings, and has demonstrated good growth. We have simulated some valuation scenarios and concluded that the company is currently fairly valued.

The Company

Agilent provides life sciences, diagnostics, and applied chemicals products to pharma, chemicals and advanced materials makers, food makers, and others. The product range includes instruments, consumables for laboratory-related work, software, and services.

The life sciences and applied market group (LSAG) contributes 56% of revenues, with the other two roughly evenly split. The Americas is Agilent’s largest market, generating 40% of its revenues, Europe 26%, and Asia Pacific 34%. With 60% of revenues from exports, short-term foreign exchange risk exists. We think this can only be transitory, can go both ways and will not affect the long-term prospects.

To concentrate on key markets in communications, electronics, and life sciences, Agilent became an independent entity after its spin-off from Hewlett-Packard in 2000. In 2014, Agilent completed the spinoff of Keysight Technologies, its electronic measurement business, Keysight Technologies (NYSE: KEYS).

Financials

Revenues were down 5.6% in the first quarter ending 31 January 2024 compared to the same period last year. At $1.66bn, these were higher than the consensus of $1.6bn. Non-GAAP EPS also came in at $1.29, 6% lower than the same period last year. This was however higher than the consensus of $1.22.

The Agilent team continued its strong execution in the first quarter, delivering better-than-expected revenue and earnings,” said President and CEO Mike McMullen. “We are well positioned for long-term growth driven by our diversified business and multiple growth drivers. While near term market challenges remain, I continue to be optimistic about our future.

Post-pandemic, many companies within this sector saw revenues increase due to pent-up demand. Once this demand was met, revenue growth stalled or declined. The macroeconomic environment also became challenging, and most businesses were cautious and unwilling to spend until they had more clarity. Apart from CrossLab, and its lab-related portfolio, revenues fell across the board, with all segments and geographies being affected. Revenues in China saw the largest drop, where weakness still exists. Looking forward, the company continues to be innovative, introduce new and differentiated products to target a larger patient population and explore untapped markets. One such product line is its new ProteoAnalyzer system introduced this quarter. It aims to improve and simplify the analysis of complex protein mixtures. This platform can be applied across the pharma, biotech, food analysis, and academia sectors. Given the current headwinds, Agilent’s better-than-expected quarterly results and its approach to investing in growth areas put it in a strong position.

They were ranked in the top 5 in the Barron’s list of 100 most sustainable companies and are included in the Dow Jones Sustainability Index.

Historical Financial Performance

Since the Keysight spin-off, Agilent has increased revenues while also improving margins and efficiency. This is a recipe for value creation, as long as this is not fueled by unmanageable debt. This does not seem to be the case as debt to EBITDA has actually gone down from 2015’s 1.7x to 1.4x, and interest coverage is more healthy than 2015’s 11.6x with 2023’s interest coverage at 19.1x.

We can see a clear trend in revenue per share increase from 2014’s $12.2 per share to $23.2 in 2023. Over this period, the company has also reduced its shares outstanding from 333m to 293m, returned approximately $5.2bn to shareholders via share buybacks, and an additional $2.0bn as dividend payouts.

Margins have also been improving year-on-year.

We are using asset turnover to measure efficiency. Asset turnover is the ratio of assets required to generate revenues. Higher ratios indicate that fewer assets were used to generate more revenues.

Returns On Cash Generating Assets Valuation Method

Before we can proceed further, below, we provide a quick introduction to ROCGA, our measure of returns, and the models we use to value companies. If you have read any of our previous articles or are familiar with cash-flow-returns-on-investments, you can skip the section below.

We use a discounted cash flow model based on Cash Flow Returns on Investments. More information on calculating cash flow returns on investment, gross cash, and gross assets can be found in Bartley Madden’s paper “The CFROI Life Cycle“. Bartley Madden is a significant contributor to the Cash Flow Returns on Investment methodology.

Returns On Cash Generating Assets or ROCGA uses the same methodology as Cash Flow Returns On Investments and is a measure of economic returns. The mean reversion theory of returns reverting to the cost of capital over time is applied. A company generates returns, and the higher the returns, in theory, the higher the valuation. The company will not be able to sustain its high returns over a prolonged period. Companies with greater competitive advantage can maintain those returns a little longer before the fade begins. A mature company’s return will fade quicker, and the earlier life cycle companies will fade at a lower rate. The model also ensures that the company is not overvalued or undervalued during different stages of the economic cycle.

The first step in using our DCF model to derive a warranted value involves modeling the company and back-testing the valuation for correlation with the historical share prices. Once confident we have captured most of the market assumptions, we use the same assumptions from the model to forecast forward, along with forecast EPS (money in) and DPS (money out). The total entity value is a function of returns, the rate of fade of those returns, and its ability to grow. The total equity value is the sum of the present value of existing assets and the present value of growth assets, minus gross debt. For mature companies, most of its value is in the existing assets, and for high-growth companies, more value is in the present value of growth assets.

The blue band in the valuation charts below represents the share price highs and lows for the year, and the orange line is the DCF model-driven historic valuation. The green line is the forecast warranted value derived using the same model along with the consensus EPS, DPS, and default self-sustainable organic growth. Self-sustainable organic growth is a ratio of investable free cash to gross assets. A more detailed breakdown of our modeling and quantitative valuation work can be found here.

The Value Drivers

Following on from improving margins and more efficient asset turnover, we see improving ROCGA, and ROCGA-x (excluding goodwill).

Returns have been constantly increasing since 2014. 2023 saw revenue growth stall and returns decline. With growth expected to be subdued going forward, we see returns flattening out for FY24 and beyond.

In the valuation section below, we will see the relationship between how improving economic returns and growth interact to determine value.

Conventional Valuation

Agilent is a quality company but given its share price rise of approximately 28% over the past six months, it does not offer any significant upside. The company is trading at a slight premium when looking at conventional valuation matrices. PE for FY24 is 26.9x, higher than its historical averages as well as the sector average of 20x. Similarly, PS of 6.4x is higher than its historic averages as well as the sector average of 3.1x. This premium comes with expected lower growth than the company’s historic averages as well as sector averages.

Cash Flow Returns On Investments Valuation

The assumptions we use in our cash-flow-returns-on-investments-based modeling tools are that the company returns are not cyclical, have strong business strength (competitive advantage), and are in the early business cycle life cycle stages. The historical average growth is used for the default valuation.

This gives us a potential upside of 29%. But we know that the default has changed and growth is going to be lower going forward.

For a more realistic valuation, we need to make some adjustments to forecast growth. Growth in our model is related to the amount of free cash the company will have available to reinvest and grow. Sometimes opportunities exist for investments, and sometimes the company will return the free cash to its shareholders through higher dividend payouts or buying back its own shares. Share buyback can be looked at as investing in its share. We know growth is going to return over the medium and apply an 11% forecast growth. This corresponds to the company’s CAGR of its gross cash over the past nine years. This is our preferred scenario and puts the DCF warranted of Agilent at fair value.

We also applied a more stringent growth by halving it to 7.5%, and this gave us a potential downside of 30% for FY24. If the tough economic conditions persist, and growth remains subdued for longer than anticipated, there is a risk of rerating and the warranted value could be significantly lower.

Conclusion

Agilent is a high-quality growth company, but our analysis shows that these are already priced in, especially given the 28% price rise over the last six months. Our DCF modeling as well as conventional valuation matrices both indicate Agilent as currently a hold.

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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Agilent Technologies: Cash Flow Returns On Investments And Conventional All Point To A Hold appeared first on Up2info.com.

• Agilent Technologies’ Q4 revenue was $1.69 billion, reflecting a 9.7% YoY decline, but the company achieved a healthy operating margin of 27.8%.
• Most regions showed sequential growth except for China, which saw a 31% decline.
• Agilent anticipates a slow but steady recovery in fiscal year 2024 with cost-saving measures and expects revenue in the range of $6.71 to $6.81 billion.

Introduction

As we slowly (or rapidly?) head toward 2024, it’s time to discuss one of the most fascinating stocks of 2023.

This year, I started covering Agilent Technologies (NYSE:A) as part of a bigger focus on the healthcare sector.

My most recent coverage was published on November 17, when I wrote an article titled “Agilent Technologies: Looking Undervalued Heading Into Earnings.”

As the title may suggest, it was an earnings preview in light of the stock’s poor performance.

Here’s a part of my takeaway (emphasis added):

While short-term uncertainties have led to a stock price decline and workforce cuts, Agilent’s strong financials, commitment to innovation, and global presence make it a compelling long-term investment that benefits from significant secular growth.

The upcoming earnings report provides an opportunity to re-assess the risk/reward scenario, with the potential for rebounding growth in China and a positive outlook beyond current challenges.

Last month, the company announced its earnings, which were better than expected. The company also presented at the Evercore ISI HealthCONx Conference, which means we have a lot to discuss!

Since my November article, the stock has returned more than 20%, making it one of the best performers in healthcare – and in the S&P 500, in general.

Over the past three months, the A ticker has returned close to 30%!

Hence, the aim of this article isn’t just to dive into 3Q23 earnings but to assess the new long-term risk/reward as we head into what is set to be yet another exciting calendar year.

So, let’s get to it!

The Company Is Back On Track

Let’s start with the raw numbers.

Agilent’s Q4 revenue was $1.69 billion, reflecting a 9.7% year-over-year decline.

Despite the challenging market conditions, the company achieved a healthy operating margin of 27.8%. Earnings per share came in at $1.38, surpassing guidance, even with a 10% decline.

Analysts were looking for $1.34 in EPS.

Although experiencing a year-on-year decline, most regions showed sequential growth, except for China, which saw a 31% decline.

Moreover, as expected, the pharma sector witnessed a 14% decline due to cautious capital expenditures, which is something almost every single one of Agilent’s peers is struggling with.

Biopharma outside China, however, saw high single-digit growth.

• Life Science and Applied Markets Group (“LSAG”): This segment achieved revenue of $928 million, reflecting an 18% core decline. This decline was attributed to customer caution in Pharma, partially offset by growth in PFAS solutions and Advanced Materials.

• Agilent CrossLab Group (“ACG”): This segment saw revenue of $404 million, marking a 4% core increase and 6% reported. Growth was observed across all regions except China, with the Contract Services business showing double-digit growth.

• Diagnostic and Genomics Group (“DGG”): DGG generated revenue of $356 million, remaining flat on a core basis and up 1% on a reported basis. In this segment, strong growth in Pathology NASD businesses was offset by challenges in genomics.

Taking a closer look at the company’s operating environment during the fourth quarter, Agilent faced a dynamic landscape marked by challenging macroeconomic conditions.

Despite these hurdles, the company showed resilience and adaptability in its end-market performance.

The pharma sector, Agilent’s largest market, experienced a substantial 14% decline, contrasting sharply with the 20% growth rate observed in the same quarter of the previous year (tough comparisons).

While biopharma and small molecule segments faced challenges, there was a noteworthy 7% growth in biopharma, excluding China, mitigating some of the overall market impact.

Mordor Intelligence expects the biopharma industry to grow by at least 8% per year through 2028.

Going forward, Agilent anticipates a slow but steady recovery in fiscal year 2024, considering market uncertainties and challenges.

Cost-saving measures of approximately $175 million are incorporated into the guidance below.

This outlook also includes revenue in the range of $6.71 to $6.81 billion, with core growth ranging from a slight decline of 0.5 to 1 point of growth.

Fiscal 2024 non-GAAP EPS is expected to be in the range of $5.44 to $5.55.

Another thing I want to highlight with regard to shareholder distributions is that the company generated an impressive operating cash flow of $516 million, which exceeds 100% of adjusted net income.

On November 16, the company hiked its dividend by 4.9%. The dividend has been hiked by 8.6% per year over the past five years. Unfortunately, the yield is just 0.7%, which makes Agilent a poor choice for investors dependent on income.

Long-Term Growth Potential

During the recent Evercore ISI healthcare conference, the company discussed longer-term growth trends.

In light of what we discussed in this article so far, the company is very upbeat about its opportunities in China – despite challenges.

The company’s recent trip to Shanghai highlighted the company’s dedication to aligning with China’s initiatives, such as the 14th 5-year plan and “Made in China 2025.”

Furthermore, the company believes that its strategic investments and adaptations to in-country sourcing lay the groundwork for future growth in one of the world’s most significant markets.

Simultaneously, Agilent is strategically positioning itself to tap into emerging opportunities globally. The company aims to capitalize on untapped potential in regions with nascent life sciences and MedTech landscapes.

Agilent believes that this dual focus on thriving in established U.S. markets and strategically entering emerging territories positions the business for sustained global growth.

Speaking of faster growth, Agilent also highlighted ongoing opportunities in the replacement cycle of small molecule instrumentation, particularly in the QA/QC labs of the pharma industry.

As customers strive to keep their fleets updated, there is a consistent demand for new instruments, creating a cyclical growth pattern every 18 to 24 months. The company sees potential for sustained growth as they believe they are approximately nine months into the current replacement cycle.

This also applies to two of my other favorite stocks, Thermo Fisher (TMO) and Danaher (DHR), which have done very well in the past.

As a matter of fact, A, TMO, and DHR have all outperformed the healthcare sector over the past ten years.

Based on these benefits, Agilent is upbeat about the growth potential in its service business, represented by Agilent CrossLab (“ACG”).

With double-digit growth in the ACG business, the company is actively working to improve connect rates, aiming to provide comprehensive services to entire labs.

This includes not only supporting their install base but also offering services beyond Agilent’s own instruments, making it a meaningful and expanding business.

On top of that, while expecting more moderate growth in the chemicals and advanced materials market, Agilent remains optimistic about long-term secular trends.

Despite potential challenges in the market, the company believes in the continued drive towards battery-powered vehicles and advancements in chemical and advanced materials, providing opportunities for growth.

Valuation

Using the data in the chart below:

• Agilent is currently trading at a blended P/E ratio of 25.5x.
• The five-year normalized valuation multiple is 26.3x.
• I believe the slightly higher normalized valuation is a fair target, as the company is expected to average 10% annual EPS growth after 2024.
• In general, it looks like Agilent and its peers will be out of the woods in the second half of 2024.
• A return to its normalized valuation would indicate a potential of 8% to 11% annual returns over the next few years, which is decent.

However, if I were to add another stock to my healthcare exposure, I would wait for a correction. Although it may come with risks of missing even more upside, I am not a big fan of the general risk/reward after the recent stock market rally.

Nonetheless, I’m sticking to a Bullish rating, as I have little doubt that the company is in a good spot to accelerate EPS growth and maintain elevated growth rates in the future.

The only reason why I do not own Agilent is my significant Danaher exposure. I do not want too many highly correlated stocks in my portfolio.

Takeaway

After a tough start to the year, Agilent Technologies emerges as a standout performer in the healthcare sector.

Despite short-term setbacks reflected in a stock decline and workforce cuts, Agilent’s recent earnings report exceeded expectations, fueling a remarkable 20% stock return.

The company’s resilience in a challenging market, strategic dividend hikes, and an optimistic outlook for 2024 and beyond underscore its long-term potential.

While I’m cautious about market risks after the recent rally, the prospect of sustained growth, especially in the service business, makes Agilent a stock worth watching for future opportunities.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of DHR either through stock ownership, options, or other derivatives. 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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• Agilent is a wonderful business with a strong competitive moat, decent growth, and excellent profitability.
• The company benefits from customer “stickiness” and growth in the biopharmaceutical sector.
• Agilent’s recurring revenue and cost reductions contribute to its financial strength and potential for higher valuation.
• The company is still facing growth headwinds, but it appears it will soon return to growth, and the valuation is currently reasonable.

It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price – Warren Buffett

We believe Agilent (NYSE:A) is one of the rare companies that can be called a “wonderful business”. It is likely that, for this reason, it has historically tended to be quite overpriced, and only rarely do investors get a chance to purchase shares at close to fair value.

The company has a very strong competitive moat, decent growth, and excellent profitability. In general, it operates in an attractive industry, where intellectual property and high switching costs give companies strong pricing power. One of the reasons for this customer “stickiness” derives from the fact that regulation of the drug manufacturing process disincentivizes customers from changing to a different tool provider, as they might have to repeat validation processes. The other reason is that once customers familiarize themselves with how to operate a given piece of equipment, they don’t want to spend the time learning how to operate a different one.

Companies like Agilent also benefit from significant growth in the biopharmaceutical sector by selling an increasing number of tools, consumables, and services. Long-term, the company believes it can grow revenues at a 5% to 7% rate, which along with some margin improvement and share count reduction could result in double-digit EPS growth.

We believe the general quality of the business has been improving since the divestiture of Keysight Technologies (KEYS) in 2014. This electronic measurements business was highly-cyclical, and allowed Agilent to focus on more advanced equipment like chromatography and mass spectrometry tools. Another improvement in the business was the implementation of the CrossLab strategy, which aims to expand services and consumables. This has resulted in the majority of Agilent’s revenue being recurrent, providing much better financial visibility and reducing customer churn risk.

Company Overview

Agilent tools have applications in a variety of end markets such as pharma & biotech, clinical and diagnostics, chemical, energy, food, and environmental applications. At the same time, the company has a nice geographical diversification.

The company estimates most of its end markets will grow between 2% and 7% long-term, with opportunities to increase market share as well as increased revenue from add-on services such as equipment maintenance.

Growth

We believe the company’s revenue growth target to be credible, given that since the Keysight Technologies divestiture, the company has averaged a quarterly y/y growth rate of ~6%. Close to the middle of its 5% to 7% target, even if recent quarters have experienced negative growth.

We believe this is largely the result of a period of over expansion by many of its customers during the post pandemic period, and it will take some time to go through the excess.

It does seem a turning point might be near, with CEO Mike McMullen recently commenting at the Evercore ISI HealthCONx conference that saw signs of stabilization in the fourth quarter.

[…] in the fourth quarter, we actually saw what we saw encouraging signs of potential stabilization because we had more instrument orders than we had shipments. So we built backlog and we had a book-to-bill over one for the first time. What, Bob in several quarters, I think.

Other reasons for optimism include Agilent’s plan to further expand its Nucleic Acid Solutions Division (NASD), which it believes is on the road to delivering more than $1 billion in revenue.

The company is also optimistic on the growth of semiconductors and lithium-ion batteries. Agilent’s portfolio addresses the entire battery value chain, from mining and materials processing to cell components and recycling. The company is also to benefit from a number of new therapeutics on the market that have a large patient population size. It believes some of this growth will start to be seen in 2024.

Financials

Agilent reported a small decline in revenue of -0.2% to $6.83 billion, mostly the result of negative foreign exchange impacts. Still, thanks in part to a 30 bps improvement in the operating margin, the company was able to deliver 4% y/y growth in EPS. The fourth quarter saw a significant year-over-year revenue decline of -8.7% and an EPS of $1.38, down 10% compared to the previous year. A big reason for the revenue decline was lower demand for instrumentation, particularly in China and the pharma end market. One bright spot was CrossLab, which delivered another solid quarter, growing +4%.

The company has been working hard, lowering its cost structure to be able to grow earnings faster than revenue. It has assured investors that some of the things it is doing right now are permanent changes where the cost won’t come back. One example is rationalization of its real estate footprint. Some of these cost reductions will have an impact in 2024 and are not expected to come back in future years. Looking at the operating margin over the past decade, it is clear that it has been trending higher.

Recurring Revenue

One of the most attractive characteristics of Agilent is the large percentage of recurring revenue it produces. This part of the business has been growing faster than the rest of the company, which makes it increasingly important when valuing the business. As recurring revenue increases, we believe a higher valuation multiple can be justified.

This is something that clearly excites CEO Mike McMullen, who said during the Evercore ISI conference that he is very bullish on this part of the business.

So the whole construct of ACG, Agilent and CrossLab was we take care of the entire lab. We’ve been doing very, very well on the enterprise service as well. So we’ve been winning a lot of multi-year large engagements where we’re going to take care of the entire fleet of the lab.

We’re also going to provide a lot of other services in addition to that asset management and other services that our customers increasingly are looking to companies like Agilent to provide. So I’m very bullish, I agree with I’m not sure who you spoke to, but I’m very bullish along with this person that there’s a lot of opportunities for service and for us, it’s become quite a meaningful business for us.

Balance Sheet

While the company does carry some long-term debt, it could pay more than half using cash and short term investments. With a net debt to EBITDA ratio of less than 1x, we are very comfortable with the strength of the balance sheet.

Shareholder Returns

Agilent pays a small percentage of its earnings as dividends, which results in a very modest dividend yield. However, the company returns significant amounts to shareholders through stock buybacks, which is reflected in a shareholder yield of close to 3%.

Outlook

Agilent is guiding for revenue growth to deteriorate even more in the first quarter of FY24, expecting year over year core revenue growth to be between -11.3% and -8.5%. Despite the tough start to the fiscal year, the company expects FY24 to deliver core revenue growth in the range of between -0.5% and 1.0%. Seen differently, the company expects to return to positive growth in the next three quarters. This appears to have been confirmed by CEO Mike McMullen at the Evercore ISI HealthCONx conference that they have “a view that we can get back to growth in 2024”.

Valuation

Agilent is trading very close to its ten-year average EV/EBITDA multiple, however, we believe the company to be much higher quality today than it has ten year ago. It has improved profit margins, and the percentage of revenue that is recurring.

It also looks reasonably valued when compared to some of its peers like Thermo Fisher Scientific (TMO), Danaher (DHR), and Waters Corp (WAT). In that group, only Thermo Fisher Scientific has a slightly lower forward P/E ratio, but the difference is minimal.

Similarly, when looking at price to cash flow from operations per share, only Danaher appears slightly cheaper, and by a modest margin. We believe overall the whole group looks reasonably valued.

Analysts on average expect FY24 to look very similar to FY23 in terms of sales and EPS, with a noticeable recovery until 2025. We believe they are being too conservative, and based on comments and guidance from management, there are reasons to be cautiously optimistic about the second half of FY24. However, a potential derailment to the return to growth could occur if a recession materializes next year in the US.

Based on our future earnings estimates, we calculate a net present value of $124 per share, which is close to the current price. We therefore believe shares are priced to deliver a reasonable return, and are upgrading our rating to ‘Buy’ as a result.

Click to enlarge

Risks

The biggest risk we see is that there is no significant margin of safety between our estimate for the intrinsic value of the shares, and where they are trading right now. Other than that, we believe Agilent to be a much lower risk compared to the average stock in the S&P 500 index (SPY) or the Russell 2000 (IWM). This is reflected in its very high Altman Z score, which is comfortably above the 3.0 threshold.

Conclusion

Agilent has experienced some headwinds in recent quarters, and is expected to see significant negative growth next quarter as well. Still, we believe headwinds will eventually dissipate, and the company will return to growth. Agilent has several attractive qualities that make the company attractive to investors, including a strong competitive moat, customer and geographic diversification, and a significant percentage of its revenue being recurrent. We believe the temporary headwinds have created an opportunity for investors to purchase shares at a reasonable valuation. Shares are trading close to our estimated fair value, and we believe they offer an attractive risk/reward to investors.

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.

The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling shares, you should do your own research and reach your own conclusion, or consult a financial advisor. Investing includes risks, including loss of principal.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• Agilent Technologies has a fantastic track record of strong EPS growth and outperforming capital gains.
• More recently, the company has faced challenges with declining stock prices and negative headlines, including workforce cuts and declining revenue.
• Despite these challenges, Agilent remains confident in its long-term growth prospects, particularly in the pharmaceutical and life sciences markets.

Introduction

This year, I started to focus more on healthcare. This includes biotechnology, drug manufacturers, wearable devices, and companies operating in the diagnostic & research industry, like Agilent Technologies (NYSE:A), the star of this article.

The stock, which has outperformed the healthcare sector and the S&P 500 over the past ten years, is currently trading more than 35% below its all-time high.

On July 13, I wrote my first article on this company, focusing on macro headwinds that currently offset longer-term secular benefits.

Agilent’s focus on resilient areas, such as the pharmaceutical industry, along with its emphasis on consumables and services, positions it well for future growth.

The company is benefiting from tailwinds in MedTech, biotechnology, and life science tools.

Although it faces challenges with conversion rates and macro uncertainties, Agilent’s strong financials, aggressive R&D spending, and global presence make it a compelling investment option with the potential to generate outperforming total returns.

Since then, the stock has been pretty much unchanged, as investors have been through a mix of headwinds and tailwinds, including mixed earnings and the market’s belief that we may be close to a Fed pivot, which would be very bullish for healthcare funding.

In light of these developments and the upcoming earnings on November 20, it’s time to re-assess the risk/reward, as I continue to believe that the company offers great long-term potential.

So, let’s get to the details!

Agilent’s Ongoing Struggles

In addition to its poor stock price performance, the company is creating negative headlines, suggesting that it is not out of the woods yet.

On November 16, the Silicon Valley Business Journal reported that the company is reacting to a slump in laboratory equipment sales by cutting its workforce.

Although this is hardly a headline that keeps investors up at night, it does represent current industry struggles quite well.

For example, in the third quarter, the company reported revenue of $1.67 billion, experiencing a core decline of 2.3% and 2.7% on a reported basis.

These numbers, which were revealed on August 15, contrast with the 13.2% core growth observed in the same period last year, which is one reason why it has had a hard time growing this year.

Factors influencing this decline include a 0.5-point currency headwind and minimal M&A contribution.

Adjusting for a revenue shift from the second quarter of the previous year, the core growth would be approximately flat compared to the prior year.

When taking a closer look at its business segments, we see a mixed picture as well, mainly driven by a tough comparison.

• Life Science and Applied Markets (LSAG): This segment reported revenues of $927 million, a 9% decline against a tough comparison of 18% growth. Market challenges in China impact LSAG’s performance across all end markets and global pharma.

• Agilent CrossLab Group: No weakness to be seen here, with revenues of $396 million, up an impressive 11% core, with growth in all regions and end markets. Strong demand for services as customers embrace Agilent’s value proposition.

• Diagnostics and Genomics Group: Revenues of $349 million, with core revenues up 3%. Pathology grew high single digits, while NASD business grew high teens. Resolution Bioscience is shut down due to market weakness, but investments in future growth continue.

To somewhat summarize the numbers and comments above, the total pharma business was down 8%, primarily due to a 30% decline in the pharma market in China.

Biopharma business grew by 5%, while small molecule was down 16%. The Chemical Advanced Materials market declined by 3%, influenced by macro concerns and a difficult comparison.

China did a number on the company’s earnings.

Excluding China, the rest of Agilent grew by 2%, surpassing expectations.

• The Chemicals and Advanced Materials market decreased by 3%, facing a challenging 22% comparison but remaining flat sequentially in dollar terms.
• The academia and government market grew by 5%, with growth in all regions except the Americas.
• The diagnostics and clinical market grew by 3%, driven by high single-digit growth in pathology.
• The environmental and forensics business grew by 2%, propelled by water infrastructure projects and increased funding for PFAS-related activities.
• The food market saw a 1% growth, primarily in Asia and Europe.

With all of this in mind, the future is far less depressing than one might assume.

The developments Agilent is facing aren’t unique. The common theme in its industry is tough comparison headwinds and ongoing weakness in China.

Looking beyond these issues, we continue to see favorable demand.

Agilent’s Future Look Strong

Despite near-term challenges, Agilent remains confident in long-term growth prospects.

During its 3Q23 earnings call, the company emphasized investing in innovation and achieving cost efficiencies to support future profitable growth.

The company is on track to achieve targeted cost savings and is positioned well for the future.

Although the company acknowledges a challenging macro environment for new instrument purchases, it is confident in the long-term growth prospects of its industry.

The Pharma market remains a focus, with innovation and advances in medicines continuing.

In the applied markets, growth opportunities are expected in PFAS testing and the electrical vehicle transition.

Statista data reveals that the market for PFAS analytical instruments alone is expected to rise to $350 million by 2028:

California’s forecasted $888 million of spending (highest of all states in the U.S.) is driven by the state’s high number of confirmed contamination sites, the state Water Board’s proactive testing for PFAS contamination, and a more rigid regulatory environment. At the same time, New Hampshire, despite its small size, falls into the top 20 spot for remediation spending at $59 million, driven mostly by its more advanced regulatory landscape.

[…] “Public water systems, including investor-owned, will need to make significant investments to meet existing and impending standards,” says Balsamo. “Our team is keen to see if looming water quality standards will accelerate utility acquisitions, especially as smaller systems face additional financial pressures to address PFAS.” – WaterWorld

The company’s biggest segment, life sciences, is also expected to see fast growth. According to a recent report:

Compound Annual Growth Rate (CAGR): The estimated Compound Annual Growth Rate (CAGR) for the Life Sciences market during the period from 2022 to 2028 is 11.75%. CAGR reflects the average annual growth rate over the specified timeframe.

Furthermore, it is making tremendous progress in developing diagnostics for, i.e., cancer treatments.

The U.S. FDA has approved Agilent’s PD-L1 IHC 22C3 pharmDx as a companion diagnostic for identifying patients with gastric or gastroesophageal junction (“GEJ”) adenocarcinoma who may be eligible for Merck’s Keytruda (pembrolizumab) treatment.

Patients with gastric or GEJ cancer whose tumors express PD-L1 pathway can now be identified for potential treatment with Keytruda using PD-L1 IHC 22C3 pharmDx.

Agilent developed this assay in partnership with Merck as a companion diagnostic for Keytruda. This marks the sixth cancer type for which PD-L1 IHC 22C3 pharmDx has gained FDA approval.

Lou Welebob, vice president and general manager of Agilent’s Pathology Division, stated, “PD-L1 expression is a critical biomarker for response to anti-PD-1 therapies such as Keytruda. This endorsement underscores Agilent’s leadership in the development of companion diagnostics for groundbreaking anti-PD-1 therapies.” – Via Seeking Alpha

Nonetheless, for the time being, headwinds prevail, causing the company to adjust its outlook (in an unfavorable direction).

The revised outlook for the full year anticipates a more challenging macroeconomic environment, particularly in China.

Hence, full-year revenue is expected to be in the range of $6.80-$6.85 billion, representing a decline of 0.7% to flat on a reported basis and core growth of 0.8% to 1.5%.

Non-GAAP earnings per share for the full year are forecasted to be between $5.40 and $5.43.

So, now what?

Fourth Quarter & Valuation

As we’re very close to the company’s fourth-quarter earnings, let’s see how high the bar is.

According to the company, fourth-quarter revenue is estimated to be in the range of $1.655-$1.705 billion, reflecting an 8% to 10.5% decline on a reported basis and a decline of 9.5% to 12% on a core basis.

Non-GAAP earnings per share for Q4 are expected to be between $1.33 and $1.36.

These numbers are visible in the chart above.

In 4Q23, analysts expect the company to generate $1.34 in EPS, which is based on eight estimates. Over the past four weeks, four analysts have downgraded their EPS expectations, which shows that a lot of negativity has been priced in.

This EPS target indicates a 12.4% decline in EPS. It’s also in the middle of the company’s own guidance range.

Although this needs to be taken with a grain of salt, I believe the company could beat estimates, as I believe that funding fears in the life science industry may be a bit overblown. I also expect that China’s healthcare industry is rebounding at a faster pace despite ongoing economic challenges overseas.

Regardless of that, I’m looking forward to the company’s comments on growth in China, healthcare inventories, and overall funding conditions in light of elevated rates.

I believe if the company hints at rebounding growth in China, we could see a stock price upswing. Comments that hint at prolonged weakness will almost certainly achieve the opposite.

Valuation-wise, we’re dealing with an attractive stock.

Using the data in the chart below:

• Agilent is trading at a blended P/E ratio of 21.7x.
• Going back 20 years, the normalized valuation multiple is 22.5x.
• This year is expected to see 4% EPS growth, followed by 4% growth in 2025. Based on these numbers, its 21.7x multiple is justified.
• However, after 2024, EPS is expected to pick up and return to double-digits. This trend is confirmed by many other healthcare companies as well, as lower inventories, stronger overseas growth, and more favorable funding conditions are expected to bring back “normal” selling conditions.

Hence, I do expect that Agilent will continue its long-term uptrend, which could result in 10-11% annual returns – even if 2024 turns out to be another slow year.

The only reason why I do not own Agilent is my investment in Danaher (DHR). This healthcare supplier is highly correlated to it.

Having that said, I look forward to 4Q23 earnings. I’m positive and expect the company to hint at rebounding demand in key areas.

Nonetheless, please be aware that this is in no way an encouragement to start short-term trading and betting on post-earnings stock price developments.

The main goal of this article was to discuss the risk/reward, which I believe is very favorable for long-term investors.

Takeaway

Despite challenges and negative headlines, Agilent Technologies remains resilient.

The company’s strategic focus on the pharmaceutical industry, consumables, and services, positions it well for long-term growth.

While short-term uncertainties have led to a stock price decline and workforce cuts, Agilent’s strong financials, commitment to innovation, and global presence make it a compelling long-term investment that benefits from significant secular growth.

The upcoming earnings report provides an opportunity to re-assess the risk/reward scenario, with the potential for rebounding growth in China and a positive outlook beyond current challenges.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of DHR either through stock ownership, options, or other derivatives. 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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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