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Executive summary:

  • Agilent cut its FY14 guidance due to disappointing performances from its Electronic Measurement business (due to be spun off in November).
  • But Core Agilent performed well and is likely to gradually accelerate thanks to academic spending recovery.
  • The stock is trading at a significant discount vs. peers but the Electronic Measurement spin-off is likely to act as a rerating catalyst.

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Electronic Measurement remains a drag

Agilent's (NYSE:A) Q1 figures confirmed two important trends. Core Agilent (Life Sciences & Diagnostics) continues to perform well with revenues up 6% despite still weak government spending. And financial discipline remains a major earnings driver as illustrated by the 17.6% operating margin reported in Q1, 50-60bps above consensus.

But these positives were overshadowed once again by poor performances in the Electronic Measurement division (revenues down 5% in the quarter), leading Agilent to cut its FY revenue target to $6.90-7.10bn from $6.95-7.15bn and EPS guidance to $2.96-3.16 from $3.03-3.33.

Contrary to our expectation, it looks like it's too early to call the recovery of the Electronic Measurement business as defense and communications verticals remain tough. Obviously, this suggests that the November spin-off of Electronic Measurement could be completed under less favorable conditions for Agilent's shareholders, even if the division still has a couple of months to demonstrate an improving momentum.

The early March analyst day could be a positive catalyst

Agilent's analyst day in early March should provide the group with the opportunity to show off the potential of the Life Sciences & Diagnostics division. As we explained last week, the division's revenue momentum should gradually accelerate. Academic research spending is indeed expected to recover in 2014: the US congress recently released the 2014 budget in which the National Institutes of Health (NIH), the nation's medical research agency which provides research grants, would receive a +3.5% budget increase from FY13 levels.

Management is also likely to highlight Agilent's increased flexibility following the Electronic Measurement spin-off: we believe that Agilent's M&A power is about to increase as the company will soon have the opportunity to use its whole balance sheet to strengthen its position in Life Sciences (through M&A) at a time of rising industry consolidation.

Unchanged confidence in core Agilent's rerating

Agilent's more focused profile is likely to be a rerating catalyst for the stock which has been trading well below peers until now. Agilent is currently trading at an EV/sales of 2.7x vs. a Tools average around 3.2x.

Due to the scarcity of players in the Life Sciences Tools space, Agilent could also command a speculative premium in our view. The upside here would be significant given that Life Technologies (NASDAQ:LIFE) was acquired last year at an EV/sales of 4x and that Illumina (NASDAQ:ILMN), widely perceived as a takeover target, is currently trading at a 11.7x ratio …

Source: Agilent: Sorting Out The Good From The Bad