Agilent Technologies - Focus Remains On The Spin-Off

| About: Agilent Technologies (A)
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Shares of Agilent Technologies (NYSE:A) jumped up in after-hours trading on Thursday following the release of its fourth quarter results which were solid.

The focus for investors will be on the spin-off of the company, anticipated to be closed before the end of 2014. I will remain on the sidelines, keeping a close eye on the effective split dates next year.

Fourth Quarter Results

Agilent generated fourth quarter revenues of $1.72 billion, down 2.8% on the year before. Revenues came in slightly ahead of consensus estimates of $0.71 per share.

Income from operations rose by 2.5% to $285 million. Note that net earnings halved to $211 million, entirely due large tax benefits of $169 million for income taxes last year.

GAAP earnings came in at $0.63 per share, down from the $1.20 reported last year.

Non-GAAP earnings came in at $271 million, or $0.81 per share, down from $0.86 per share reported last year. Analysts were looking for earnings of $0.76 per share.

CEO Bill Sullivan commented on the fourth quarter developments, "We finished the year with a solid quarter, building backlog and exceeding EPS guidance despite challenges in several of our markets. This reflected our ongoing commitment to actively manage expenses and reduce manufacturing costs in a period of economic uncertainty."

Looking Into The Results

While revenues were relatively weak, the order intake rose by 4.4% to $1.83 billion. As such Agilent reported a solid book-to-bill ratio of 1.06.

Despite the drop in revenues, Agilent's cost structure has been well-aligned in recent times. The cost of production, research & development costs, as well as selling, general & administrative costs all fell, resulting in a modest jump in operating income.

The large tax benefits last year are the only reason why GAAP earnings were falling. The gap between GAAP and non-GAAP earnings was mainly caused by $48 million in intangible amortization charges as well as multiple other small charges.

The life sciences and diagnostics business reported an 8% jump in revenues to $601 million as operating earnings rose by 26% to $115 million.

Chemical analysis revenues rose by 6% to $445 million, as income from operations rose by 23% to $102 million.

The electronic measurement business reported a modest 1% jump in revenues to $705 million. Income from operations was up nearly 4%to $134 million.

Looking Forward

For the current first quarter, Agilent sees first quarter revenues of $1.68 to $1.70 billion, with non-GAAP earnings seen between $0.65 and $0.67 per share. This implies that revenues are seen between flat and plus one percent compared to a year ago.

The first quarter guidance came in below consensus estimates of earnings of $0.73 per share on revenues of $1.72 billion.

Full year revenues are seen between $6.95 and $7.15 billion, with revenues seen up 3% at the midpoint of the range. Full year non-GAAP earnings are seen between $3.03 and $3.33 per share.

Analysts were looking for full year earnings of $3.17 per share on revenues of $7.04 billion.


Agilent ended its fourth quarter with $2.67 billion in cash and equivalents. Total debt stood at $2.70 billion, for a flat net cash position.

Revenues for the fiscal year of 2013 came in at $6.78 billion, down a percent compared to last year. Net earnings fell some 37% to $724 million on the back of tax benefits last year, and increasing costs amidst stagnating revenues.

Factoring in gains of 5% in after-hours trading, with shares exchanging hands at $53 per share, the market values Agilent at $17.5 billion. This values the company at 2.6 times annual revenues and 24 times annual earnings.

Agilent pays a quarterly dividend of $0.12 per share, for an annual dividend yield of 0.9%.

Some Historical Perspective

Long term holders in Agilent have seen fair returns. For most of the past decade shares have traded in a $20-$40 trading range, with exception of the crisis in 2009 when shares were approaching the $10 mark.

Ever since, shares have risen to levels in the low-fifties at the moment, still being far removed from all time highs around $150 at the turn of the century. Between 2009 and 2013, Agilent has increased its annual revenues by little over 50% to $6.8 billion. The company posted earnings just north of a billion dollars in 2011 and 2012, falling back to levels below in 2013.

Investment Thesis

Despite the poor results based on the headline numbers, investors are relieved with Agilent's report. The strong order intake and expense reduction in the final quarter sparked enthusiasm among investors.

Yet the focus of investors and the wider Wall Street community is on the announced split of the company, expected to be completed by November of 2014.

Back in September, when Agilent announced its intentions to split up the company I last took a look at the prospects of the firm. I concluded that investors had to mark their calendars, looking for the effective split date, which is now expected to happen before November of next year.

Agilent will remain focused on life sciences, diagnostics and applied markets, while retaining the current name. This business will have revenues of approximate $4 billion per annum, and will be led by CEO Sullivan.

The electronic measurement business will operate as a separate entity of which the name is still not known to date. Revenues for this business are seen close to $3 billion as the newly created business will be led by COO Neresian. It is notably the electronic measurement business which is not performing as hoped for at the moment, creating a "conglomerate discount" for the entire Agilent firm.

While I don't think the valuation after this year's return is very appealing, I applaud the spin-off and the guidance for the full year of 2014. I would not expect shares to outperform the wider market, but will keep an eye out for the effective spin-off date. As such I could jump on the short term bandwagon, anticipating some short term outperformance going forwards.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.