Business Overview:
Agilent Technologies (NYSE:A) is a California-based provider of laboratory instruments and services. With a market cap of $19 billion, it is one of the largest providers of lab technology in the world, exceeded only by the more bio-focused Illumina (ILMN). Agilent focuses on 6 key markets: Food, Environmental and Forensics, Pharmaceutical, Diagnostics, Chemical and Energy, and Research. Agilent has global exposure, with 27% of Revenue coming from Europe, and 39% coming from the Asia Pacific region. They are a well-run company whose upper management has been together unchanged for 2 years and counting.
Strong Lineup Of New Products:
Agilent's Life Sciences & Applied Markets Group has a strong lineup of products that will be attractive upgrades for lab managers. Their Intuvo 9000 Gas Chromatography (GC) line and Cary UV-Vis spectrophotometers (the latter of which I directly work on) are widely considered to be the best in their class, and are integral pieces of equipment in labs. Agilent is known for reaching out to lab managers and using feedback to optimize products to changing needs.
The feedback to new instruments at conferences has been extremely positive. The Intuvo 9000 was selected as the Green Product of the Year at the ACCSI 2017 conference. The 1260 Infinity Liquid Chromatography (LC) system won the 2017 Scientists' Choice Award for Best New Separation Product (Q2 earnings call). Labs with aging equipment now have especially strong motivation to upgrade their systems, and the new Intuvo will build on the success of the popular 7890 line in the GC front.
A new LC-MS (liquid chromatography coupled to mass spectrometry) product, the Ultivo, has reduced the lab footprint (read: space required) of its predecessor by 65%. As explained by Senior VP Patrick Kaltenbach,
"it's 1/3 of the space that [the predecessor] would take. Bench space in these applications, that is very important... [The customers] have not 1 or 2 of these instruments. They have 10, 20, 50 of these instruments in the lab, and they're looking at opportunities… to better leverage the bench space they have. It's a matter of throughput. It's a matter of cost per sample. That is important to these customers." (Goldman Sachs 2017 Global Health Conference, 6/14/17)
The Diagnostics Group secured a major win by beating out competitors to become the vendor of equipment to the diagnostic services giant Quest, a testament to the quality of their equipment. The GentiSure Assay (type of CGH assay), a new offering by Agilent, will fulfill an important need for geneticists. Routine newborn screening is carried out in all 50 states (CDC, 2011), but is generally metabolism-focused and narrow in scale. CGH assays provide geneticists the ability to screen for chromosomal abnormalities in newborns who present with unexplained learning developments.
Risk Factors:
There are several risk factors unique to Agilent. Agilent’s customers are primarily government agencies, research institutions, and biopharma companies. From Agilent’s 2016 Annual Report, “Fluctuations in the research and development budgets at these organizations could have a significant effect on the demand for our products.” The funding of these institutions is highly nuanced and political. Additionally, the current White House has shown a willingness to cut science funding with slashes to NIH and EPA funding.
However, these implications for Agilent are relatively small. The only serious risk is a slowdown in biopharma spending, which represents 29% of Agilent’s revenue by sector (Q2 earnings call). A slowdown in that historically volatile sector would throttle the growth of Agilent’s Life Sciences division. However, current estimates on spending are optimistic amidst strong indications from the sector.
Investor Implications And Big Picture:
Agilent is a strong candidate for a long position. They report Q3 earnings after close on August 15th. Management is notoriously conservative with guidance, and Agilent consistently beats estimates. Their strong lineup of new products should bring in orders from labs with aging GCs and other equipment. In the midst of a strong quarter for biopharma, buying in before earnings will be a favorable move.
As explained in Deloitte's 2017 Global Life Sciences Outlook research, "Life sciences sector growth is closely tied to global health care expenditures which, in 2017 and successive years, are expected to be fueled by increasing demand from an aging population and the prevalence of chronic and communicable diseases." While funding in academia and government are currently slowing, the Diagnostic and Life Sciences groups have achieved strong organic growth. The underlying population-scale factors described above will continue to drive growth in Agilent's bell-cow divisions.
Agilent's situation can be compared to Nvidia's (NVDA) rise in tech over the last 5 years - as the world turns toward AI, machine learning, and automation, Nvidia delivers the hardware that make these systems functional, and their valuation has increased accordingly. Similarly, as the world of science advances to gene therapy, informatics, and high-throughput applications of diagnostics, Agilent provides the equipment to make this progress possible.
