Agilent Technologies: A Worthwhile Investment

| About: Agilent Technologies (A)


Agilent Technologies Inc. has recently announced results for Q2 FY 2014 that are close to analysts' expectations, but are lower than the revenue and income earned in Q2 FY 2013.

The negative sales growth at the company's EM segment and costs associated with its spin-off adversely impacted the company's top and bottom line performance in Q2 FY 2014.

The company has planned to conclude the spin-off of its EM segment into a publicly traded company named Keysight Technologies by the end of FY 2014.

The company currently has a consensus rating of buy and a consensus target price of $60.38, reflecting upside from its current price at around $54.97.

Agilent Technologies Inc. (NYSE:A), a measurement company that provides core bio-analytical and electronic measurement solutions to various industries, has recently announced its Q2 FY 2014 results. The company disclosed a mixed performance in Q2 FY 2014 while the organization is in the process of restructuring itself. In this article, we will discuss an overview of the company's performance in Q2 FY 2014. Additionally, I will also discuss updates on the company's on-going restructuring program and recent developments in the company's products.

Mixed Results in Q2 FY 2014

Source: Q2 Fiscal Year 2014 Results Presentation

Agilent Technologies reported revenues of around $1,731 million in Q2 FY 2014, slightly above the consensus estimate of $1,730 million. On the other hand, the company's revenue of $1731 million in Q2 FY 2014 was down around 0.1% in comparison to Q2 FY 2013 (see graphs above). The company reported 7% higher orders ($1.81 billion) in Q2 FY 2014, in comparison to orders of $1.69 billion in Q2 FY 2013 (see charts above). The company reported revenue growth in all of its segments, with the exception of its electronic measurement group "EMG" segment. The EMG segment, that is planned to be spun off from Agilent Technologies, recorded a 2.2% fall in its revenues in Q2 FY 2014 compared to Q2 FY 2013 (see table below).

Source: Yahoo Finance

The company's chemical analysis group's "CAG" revenues were up 2.5% in Q2 FY 2014 in comparison to Q2 FY 2013, led by growth in the food and energy markets. The company's life sciences and diagnostics group's revenues were up 1.1% in the recently reported quarter compared to Q2 FY 2013, led by the pharmaceutical and diagnostics/clinical markets.

Source: Q2 Fiscal Year 2014 Results Presentation

As far as Agilent Technologies' bottom line is concerned, the company posted an EPS of $0.72 in Q2 FY 2014 that was just $0.01 down from analysts' estimates of $0.73. During the same quarter in the previous year, Agilent Technologies posted an EPS of $0.77 (see graph above). The company's net income dropped 10% in Q2 FY 2014 in comparison to its net income in Q2 FY 2013. This was because the company's results were hit by costs related to the planned spin-off of its electronic measurement business. The company recorded pre-separation costs of $41 million, and integration and transformation costs of $10 million in Q2 FY 2014.

Electronic Measurement Business Spin-off

On September 19th, 2013, Agilent Technologies declared its plans to split into two publicly traded companies. One of these companies would consist of the life sciences, diagnostics, and chemical analysis businesses (LDA), and would retain the Agilent Technologies' name. The other company would consist of the company's current portfolio of electronic measurement products (see pie charts below). The separation into two entities is expected to occur through a tax-free pro rata spin-off of the electronic measurement company to Agilent Technologies' shareholders. The spin-off is anticipated to be concluded in early November 2014. The company has projected it would incur pre-separation expenses of $100 million in FY 2014. The separated business will be named Keysight Technologies, and is expected to trade as a common stock on the New York Stock Exchange with the ticker symbol KEYS.

Source: A Separation Presentation

Agilent Technologies hopes to create two strong companies through this spin-off, as Agilent Technologies will then be able to improve its performance by focusing more on its growing segments. This action of the company will escalate the strategic flexibility of both standalone businesses. Electronic measurement is a more cyclical business, while LDA holds high growth potential. Hence, by separating its electronic measurement business, the company is reducing its exposure to the cyclical electronic measurement industry. Agilent Technologies expects its core revenue growth to reach 6% (see table below) in FY 2015, as the spin-off will be concluded by the end of FY 2014.

Source: An Analyst Meeting 2014 Presentation

Recent Events Overview: New SureDirect Blood PCR Kit

Agilent Technologies recently launched a new Polymerase Chain Reaction (PCR) Kit known as SureDirect Blood PCR Kit. This kit will allow amplification of DNA directly from blood and blood derivatives, without the requisite for nucleic acid extraction and isolation. The new kit will simplify the DNA amplification workflow and will reduce the turnaround time, as it will allow PCR from fresh, dried, and frozen blood. It will also enable PCR from serum and plasma from human and animal samples.

The SureDirect Blood PCR kit contains Agilent Technologies' latest innovation DMSO, which is the inhibitor-resistant polymerase. It also has positive control template and primers. The polymerase provides the ability to overcome anti-coagulant and blood PCR inhibition, as a result of which DNA target amplification becomes easier and quicker. The kit will provide researchers with greater flexibility in experimental design, and is made to serve the international research community.

The global human identification market, the market related to DNA testing, was valued at $419.4 million in 2013. Looking forward, the global human identification market is projected to reach a value of $804.0 million by 2018, growing at a CAGR of 13.9% between 2013 and 2018. Government support in the form of grants and funds and the need for new technology in order to reduce time and costs related to DNA analysis will drive the growth of the global human identification market in the coming years. These factors indicate the fact that Agilent Technologies' launch to SureDirect is in line with the growth trends for the human identification market. SureDirect will add to Agilent Technologies' genomics and diagnostics portfolio. Agilent Technologies expects its genomics and diagnostics segment will generate 17% of the company's total revenue in the coming periods.

Expectations, Price Targets, and Final Take

The company has recently updated its earnings guidance for FY 2014. Agilent Technologies is projected to record revenues of $6.9-$7.1 billion in FY 2014, compared to the consensus estimate of $6.98 billion. The company has a guidance that targets an EPS of $2.96-$3.16 in FY 2014, compared to the consensus estimate of $3.08.

Analysts at Zacks recently restated a neutral rating on shares of Agilent Technologies. They now have a $60 price target on the stock, while the stock is currently trading at around $54.97. The analysts at Jefferies Group have reaffirmed a buy rating on shares of Agilent Technologies, with a $66 price target on the stock. Overall, the company currently has a consensus rating of buy and a consensus target price of $60.38.

The company disclosed mixed financial results in Q2 FY 2014, as both the company's revenue and earnings were just close to the consensus estimates, but down compared to Q2 FY 2013. The costs related to the planned spin-off of the company's electronic measurement business by the end of FY 2014 negatively impacted the company's bottom line in Q2 FY 2014. The company's electronic measurement segment was the only one among the company's segments that reported negative growth in its revenue in Q2 FY 2014 in comparison to Q2 FY 2013. By spinning off this segment, the company expects to focus on high-growth areas and improve its financial position and performance. The company has also recently launched a PCR kit that incorporates advanced methodology to serve the growing human identification market. The price targets set by various analysts on the company's stock indicate handsome upside potential from its current share price, also making the stock a worthwhile investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by a Gemstone Equity Research research analyst. Gemstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Gemstone Equity Research has no business relationship with any company whose stock is mentioned in this article.