Agilent Technologies, Inc. (NYSE:A) has rallied over the last several months, outperforming the broader market, up more than 25% from its June stock price low. The story this year has been the strong demand for its laboratory instrumentation products and services despite the challenging macro environment.
We expect the company's upcoming quarterly report to reaffirm a trend of climbing margins and earnings momentum to support further upside in the stock through 2023. Solid fundamentals including an impressive dividend growth profile make Agilent worthy of consideration for long-term investors.
Agilent is set to report its fiscal 2022 Q4 earnings on November 21st, after the market close. Management has guided for Q4 EPS between $1.38 and $1.40, which represents a 39% year-over-year increase at the midpoint. The net revenue target range approaching $1.8 billion, if confirmed, suggests 6% growth. Keep in mind that within the revenue figure, the "core" growth, which excludes the impact of some divestitures, is expected even stronger at closer to 11% y/y.
The setup here is for a continuation of the themes from Q3 where core segments demonstrated "broad strength" and "robust growth" according to the company. Margins have trended higher over the past year, reaching 30.9% in Q3 from 27.9% in Q4 2021, and will remain a key monitoring point.
Beyond efforts at controlling expenses, one of the positives has been the impact of the launch of new products including high-tech instruments that are fully integrated with a software analytics suite. Customers are responding to these innovations, allowing Agilent to command higher pricing.
Management noted diverse growth drivers. One of the strongest areas has been from Chemical & Energy end markets, where revenue was up 22% y/y in the last quarter. High energy prices have accelerated both investments into the sector, and exploration activity often requiring the sampling from Agilent spectroscopy and liquid chromatography tools. There is also an aspect of demand related to advanced materials applications with a global focus on sustainability.
Sales to the Pharma & Biotech end market are also growing above double digits, as molecular and cellular analysis is more important than ever. This group also has some crossover with Diagnostics and Genomics. Strong activity in drug clinical trials and cancer testing is expected to continue boosting sales.
Finally, management also noted food science applications on the commercial side have seen an uptick. Customers in China, for example, purchase the equipment in an effort on testing self-sufficiency which had previously been an expansion bottleneck. Overall, Agilent has a history of beating earnings estimates, and we see upside to the Q4 results to cap off a record year.
The latest update from Agilent is its 7.1% increase to its quarterly dividend rate now at $0.225 per share. This dividend is payable on January 25th, 2023 for shareholders of record as of January 3rd. The increase marks the 10th consecutive annual hike going back to the company's dividend initiation in 2012.
The annualized rate at $0.90 per share, or approximately $270 million as the annual payout compares to the 2022 full-year EPS estimate at $5.07. This implies an otherwise conservative earnings dividend payout ratio of just 18%.
While the current yield at 0.6% is modest, the expectation is for Agilent to continue with annual dividend growth going forward with room for the payout ratio to trend towards 25% consistently over time with other healthcare sector comparables.
From the consensus estimates through 2025, the market sees Agilent averaging 10% annual earnings growth. Recognizing this latest dividend hike was incrementally small and below current year earnings momentum, the attraction of Agilent is that it has room to deliver bigger dividend increases over the next decade.
The company is also active with share repurchases, conducting $287 million in stock buybacks this year with $573 million remaining under the existing repurchase authorization. Overall, the outlook here is for a total shareholder yield to approach 2% between the dividend and recurring buybacks
There's a lot to like about Agilent which benefits from several high-level growth tailwinds across healthcare and industrial industries. Indeed, that diversification across end markets is a strong point for Agilent as it captures a share of an expanding opportunity. Ultimately, the shift into more high-tech solutions, including software, supports both higher long-term margins and a valuation premium.
There is a case to be made that Agilent is a more direct play on this theme compared to competitors like Danaher Corp. (DHR), Thermo Fisher Scientific Inc. (TMO), and Waters Corp. (WAT) which offer an alternative but often commoditized, solutions in life sciences. Curiously, this peer group all trade at a similar earnings multiple averaging a forward P/E ratio of 25x. In our view, Agilent at a 26.5x multiple deserves a higher premium given its exposure to higher growth applications like genomics and tech leadership.
From the stock price chart, shares of A have trended higher in recent months, but are still below peak levels in 2021 when the stock approached $180 as an all-time high. The bullish case from here is that both the operating and financial momentum continues, but the macro picture also turns more positive into 2023 supporting more favorable market risk sentiment.
We want to see interest rates stabilizing, inflation trending lower, and also a pullback in the Dollar opening the door for a valuation multiple expansion. In this scenario, we expect Agilent to lead higher and reclaim its all-time high as the price target.
For the upcoming Q4 earnings report, positive guidance by management including 2023 targets at least in line with the current consensus can set the stage for more positive momentum.
In terms of risks, weaker-than-expected results defined by a slowdown to the topline would pressure the stock. China is an important market for Agilent which always carries some geopolitical volatility, but may also be positive for growth next year assuming fewer Covid-related disruptions in the region.
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This article was written by
BOOX Research is now Dan Victor, CFA
15 years of professional experience in capital markets and investment management at major financial institutions.
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Disclosure: I/we have a beneficial long position in the shares of A either through stock ownership, options, or other derivatives. 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.