Agilent Technologies Inc. (A) produces measurement and diagnostic devices for three main divisions: life sciences, chemicals, and electronic. The company was spun off from Hewlett-Packard Co. (HPQ) a little more than 10 years ago to focus on its own core business.
Beginning around 2009, the company began a major restructuring program to reduce costs and streamline its operations. This included a decent number of brand divestitures. These operations have been fruitful leading to approximately 20 CAGR revenue since beginning 2009, and even greater proportional increases in net income. The company has recently pursued some acquisitions notably in the form of Varian, which increased its brand presence in the life sciences division.
Agilent attracted my attention by satisfying many of the value propositions I screen for: E/P twice the rate of the risk free rate, P/E ratio less than 40% of the max P/E over the past 5 years, current ratio above two and tangible book value greater than total debt. I got these from Benjamin Graham. Agilent satisfied all of these metrics and further piqued my interest with an 8+% FCF yield.
The company's balance sheet is in excellent shape. Its cash and short-term investments have been growing steadily over the past four years and the company would have an extra $1.5B if it paid off all of its long-term debt with cash now. The company has decreased its debt significantly over the past two years after finishing its restructuring. Consequently, the company is not in serious danger if there is a major market downturn. In fact, the company feels strongly enough about its financials that it has initiated a 40 cent dividend for the first time.
The reason the company has so much cash is that the money is made abroad, and repatriating earnings would subject these funds to significant income taxes. However, this is already being taken into account by the markets as evidenced the 2Q earnings conference call. Nonetheless, they already make good use of the cash by being able to pay for expenses locally and investing in the brand.
The company's presence abroad also lets it take advantage of many tax holidays. This has resulted in it paying an astronomical low level of taxes (less than 10% of taxable income). This is coupled with net operating losses of $272MM, allowing the company to continue to pay low taxes for the foreseeable future even if tax rates rise. This situation makes Agilent extremely well placed to take advantage of any revenue growth.
The company is also well positioned to take advantage of future revenue growth because of its efficiency. With net profit margin=15%, gross margin=53%, operating margin=16% and ROE=29%, Agilent has greater margins than its competitors Thermo Fisher Scientific (TMO) and Danaher (DHR). Margins could easily improve in the future because Agilent has large fixed costs allowing marginal increases in revenue to have a significant impact. Margin growth could be a catalyst time goes by.
Looking forward the company is well positioned to take advantage of a variety of trends. In its electronic measurement division, the company will receive a significant amount of revenue from the movement of mobile platforms from 3G to 4G. The company also has exposure to the growing area of DNA/RNA analysis.
The company sells equipment to companies in the communication, defense, pharma, research/academia, food, chemical energy, and semi conductor industries. In this way, Agilent becomes a great way to get exposure to a variety of industries.
More significantly, Agilent becomes a way to bet on technology in general. For example, it is difficult to predict if the Droid or I-Phone platform will win. However, we know that mobile connectivity will increase and Agilent allows one to take advantage of this. This is evidenced by the improving book to sale ratio of 1.1 currently for the company, and the $100MM increase in backlogs for the company. This indicates strong demand for the goods and a good opportunity to improve earnings.
There are definitely risks to the thesis. Even though the company's balance sheet it strong, it may not result in any increase in the stock's price as the markets take their time in waking up to issues such as these. Additionally, the company is quite cyclical in nature as evidenced by the company's poor operating results in 2009. However, the company is better positioned and more efficient than it was. The business is R&D intensive, which does not always pan out; however, Agilent has had strong history of production. Additionally, the company's products require a significant amount of lead time, making it not most nimble in responding to changes in the economy. The company's inventory has gradually increased, but not rapidly, and as mentioned the company does have a significant backlog. The company is not at risk in terms of currency because its revenue streams are quite diversified and it does hedge.
Nonetheless, Agilent, a company with long-term growth can currently be bought at an EV/EBITDA of around 8x, and a P/E ex cash below 12x, while the predicted growth rate is around 12%. This appears to be a strong value proposition for a well run and diversified company.