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Summary

  • Agilent is due to break itself up into two companies in November.
  • I've been a part of a few breakup stocks, and they've done well against the broader market.
  • The split will have one company carrying the life sciences business, while the other company keeps the electronics business.

Parting ways with things is usually a difficult thing to do, whether it's a girlfriend, your first car, or even your favorite foods when starting a diet. Almost always, subtracting that something from your life might end up being a good thing, because you end up learning that thing wasn't too good for you, allowing you to learn and grow from the experience, and that's what I'm going to focus on; the growth potential of Agilent Technologies Inc. (NYSE:A) in parting ways with one of its business units.

Within the past couple of years, I have subscribed to this theory a few times, with the ConocoPhillips (NYSE:COP), Abbott (NYSE:ABT), Covidien (NYSE:COV), National Oilwell Varco (NYSE:NOV) and News Corp. (NASDAQ:NWSA) breakups. In the Conoco breakup, you got shares of Phillips 66 (NYSE:PSX), Conoco retaining the upstream portions of the oil business and Phillips 66 keeping the downstream portions. From this breakup, COP itself is up 58.44% (excluding dividends), but PSX is up 147.72% (also excluding dividends)! In the ABT scenario, you received shares in AbbVie (NYSE:ABBV), AbbVie maintaining the legacy pharma business and Abbott holding onto the nutritional/medical device segments. The list just keeps going; take a look at the table below, which shows the massive gains in the portion of the company that spun off from the parent company, when compared to the S&P 500 (NYSEARCA:SPY).

Starting Date

Ticker

% Gain

S&P

02Jul13

(NASDAQ:FOXA)

20.31

21.17

NWSA

18.85

05Jan13

ABT

22.07

33.45

ABBV

58.67

11May12

COP

58.44

39.45

PSX

147.72

09Jul13

COV

56.15

19.28

(NYSE:MNK)

78.73

03Jun14

NOV

5.1

1.65

(NYSE:DNOW)

-4.13

I found a pretty cool site that I've been utilizing, which shows all the upcoming spin-offs, to try and pick up some other potential winners like the examples above. One company I like is Agilent. Agilent is a measurement company providing bio-analytical and electronic measurement solutions to the communications, electronics, life sciences and chemical analysis industries. The company plans to create two publicly traded companies; one in the life sciences, diagnostics and applied markets, which will keep the Agilent name, while the second company will keep all the electronic measurement products and take on the name Keysight Technologies. The split is supposed to take place sometime in November. I'd like to take a moment to evaluate the stock on a fundamental, financial and technical basis to show why I bought shares of the company right now for the healthcare sector of my dividend portfolio. In order to make space for this stock in my portfolio, I sold Covidien, because I felt the upside was capped due to the takeover announcement by Medtronic (NYSE:MDT).

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 28.09, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future, as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 17.4 is currently fairly priced for the future in terms of the right here, right now. The 1-year PEG ratio (2.56), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is expensively priced, based on a 1-year EPS growth rate of 10.98%.

Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 0.89% with a payout ratio of 25% of trailing 12-month earnings, while sporting return on assets, equity and investment values of 6.7%, 13.5% and 10.2%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I don't believe the 0.89% yield of this company alone is good enough for me to take shelter in for the time being.

Technicals

(click to enlarge)

Looking first at the relative strength index chart [RSI] at the top, I see the stock approaching overbought territory, with a current value of 67.61. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is above the red line, with the divergence bars increasing in height, indicating bullish momentum should be starting. As for the stock price itself ($59.27), I'm looking at $59.71 to act as resistance and $58.33 to act as support, for a risk/reward ratio which plays out to be -1.59% to 0.74%.

Conclusion

This isn't the type company I would normally invest in, but because I believe the spin-off can provide lots of value, I decided to purchase it for the dividend portfolio. Fundamentally, I believe the company is fairly valued on 2015 earnings estimates, but expensive on growth expectations. Financially, I'm giving up quite a bit of dividend, but the capital appreciation in Covidien is capped. On a technical basis, the stock doesn't have a favorable immediate-term risk/reward. The deal with Medtronic for Covidien was part-cash, part-stock offer, and I don't necessarily like Medtronic. Otherwise, I would have been in that stock already; hence, why I sold Covidien. I will provide reports on how each is doing against each other as the future progresses.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Source: Breakup Story: Agilent Technologies Is Going To Be A Breakout