Update: Agilent Earnings - Core Business Continues Do Deliver, Keysight Reassures

Aug.15.14 | About: Agilent Technologies (A)

Summary

Solid Q3 beat: revenues of $1.77bn vs. consensus of $1.75bn and EPS of $0.78 vs. consensus of $0.74.

In line with our scenario, core Agilent records a rising order momentum driven by increased government spending while Keysight finally recovers.

Keysight’s improving momentum suggests that the November spinoff could be completed under favorable conditions for Agilent's shareholders.

We reiterate our positive view on the stock. Agilent's more focused profile and improving momentum are likely to be rerating catalysts.

Agilent (NYSE:A) delivered a solid Q3, with both revenues ($1.77bn vs. consensus of $1.75bn) and EPS ($0.78 vs. consensus of $0.74) coming in ahead of expectations. Core Agilent (Life Sciences & Diagnostics) continued to perform well with revenues up 6% and orders up 9%, driven notably by increased government spending. And importantly, Keysight (the Electronic Measurement business), which had been a drag on Agilent's overall performances for a long time, delivered a healthy quarter with revenues up 8% and orders up 7% (first positive organic growth quarter since Q2 2012). Agilent tweaked its FY14 guidance and now expects revenue of $6.99-7.03bn and non-GAAP EPS of $3.04-3.08 (vs. $6.90-7.10bn and $2.96-3.16 previously).

In our February article "Agilent: High Level Of Confidence Heading Into Q1, FY14 Shaping Up Well", we highlighted the potential of the Life Sciences & Diagnostics division. We expected academic research and government spending to recover in 2014 and to gradually improve the division's revenue momentum. Management's comments during the conference call and the acceleration in the division's order intake (+9% vs. +5% in Q2 and +2% in Q1) confirmed our view. In this article, we also called the recovery of the Electronic Measurement business. Our call came a bit early as Agilent reported a very disappointing performance in this business in Q1. But since then, the business has recovered with two consecutive quarters of solid order intake (+11% and +7% respectively in Q2 and Q3 thanks notably to strong base stations business in China and Europe), suggesting that Q1 was just a bump on the road to recovery.

In all, we reiterate our positive view on the stock for three main reasons. First, the November spinoff of Keysight could be completed under favorable conditions for Agilent's shareholders, now that the division has been able to demonstrate an improving momentum. Second, 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. Third, Agilent's more focused profile is likely to be a re-rating catalyst for the stock which has been trading well below peers until now (EV/sales of 2.7x vs. a Tools average around 3.2x).

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