Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Shares of Agilent (A) took a beating ending the week 8% lower. The measurement company, which focuses on bio-analytical and other measurement solutions, reported its third quarter results on Wednesday.

Third Quarter Results

Agilent reported disappointing third quarter revenues of $1.72 billion, up 2% compared to last year. On average, analysts expected the company to report revenues of $1.79 billion. GAAP net income fell from $330 million last year to $243 million, or $0.69 per share. Adjusted earnings came in at $278 million, or $0.79 per share, below analysts consensus of $0.82 per share. Agilent had a lot of one-offs during the quarter, including intangible amortization costs, acquisition and integration costs and other write-downs.

New order intake was quite weak. Orders fell 1% on the year to $1.66 billion. Some key areas of weakness were the aerospace and defense sector, which recorded an 11% decline in revenues on fears of automatic spending cuts. Other weakness was seen in industrial markets and environmental markets, with the latter also related to budget cuts. The forensic market was strong, reporting 17% revenue growth.

Integration of the $2.2 billion acqusition of Danish Dako is on track. The acquisition will add $85 million in fourth quarter revenues.

CEO Bill Sullivan commented on the results, "Agilent's performance in the fiscal third quarter did not meet our revenue and EPS guidance. We have clearly entered an environment of much slower growth, resulting in deals taking longer to close and customers delaying their order deliveries."

Outlook

For the fourth quarter, Agilent is now anticipating revenues of $1.76-$1.78 billion. Non-GAAP earnings per share are expected to come in between $0.80-$0.82. This compares to third quarter non-GAAP earnings of $0.79 per share. The fourth quarter outlook is very soft. Analysts expected non-GAAP earnings per share of $0.93, on revenues of $1.87 billion.

For the full year of 2012, the company anticipates revenues of $6.85-$6.87 billion. Non-GAAP earnings per share are expected at $3.06-$3.08 per share. Both metrics came in lower than previously guided.

Valuation

Agilent ended its third quarter with $1.9 billion in cash and equivalents. It operates with roughly $2.2 billion in short and long term debt, for a net debt position of $300 million. For the first nine months of 2012, the company reported net revenues of $5.1 billion. The company reported net profits of $728 million, or $2.06 per diluted share.

After last week's plunge, the market values the firm at $13 billion. Based on Agilent's full year outlook, the firm is valued at 1.9 times annual revenues and 12 times non-GAAP earnings.

The valuation compares to a revenue multiple of 1.8 times for Thermo Fisher (TMO) and 2.3 times for Danaher (DHR). These competitors trade at 19 and 17 times trailing annual earnings, respectively.

Currently, the company pays a quarterly dividend of $0.10 per share, for an annual dividend yield of 1.1%.

Investment Thesis

Year to date, shares of Agilent trade with modest gains of 6%. Shares quickly advanced to levels around $45 in the first three months of the year, but fell back to trade around the $40 mark. Last week's plunge send shares back to $37 per share.

Over the past five years, shares have gained a mere 10%, trading in a wide trading range of $15-$50 per share. While Agilent's business model was not immune for the recession, it did recover quickly from the downturn. 2012's expected revenues of $6.86 billion, come in ahead of 2008's annual revenues of $5.77 billion. Earnings per share advanced from $1.87 in 2008 to a rough estimate of $2.70 for 2012, on a GAAP basis.

While Agilent missed the third quarter consensus, and it guides for a soft final quarter, the market reaction might be overdone. The weakness can be traced back to uncertainty regarding the "fiscal cliff" discussions, resulting in government organizations delaying order placements. The temporarily delay, might result in catch-up demand in the start of Agilent's fiscal 2013.

After the recent decline, I think that shares of Agilent do offer compelling value in the medium-to long term.

Source: Agilent - Shares Offer Value After Last Week's Sell-Off