Agilent (A: $84)
Coverage initiated December 16, 2019 at $84 in the HEALTHCARE portfolio.
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Company Overview. Agilent is a Healthcare company that was spun out of Hewlett-Packard in 1999. At the time, it was the largest IPO in Silicon Valley history. The company improves the laboratory workflow by providing analytical instruments, software, and various other services that enhance quality and efficiency. The company also provides lab management services, including asset management, equipment management, laboratory business intelligence, software maintenance, and genomics and cloning.
Business Model. Management divested the company of several underperforming business lines during the early 2000s, when economic uncertainty reduced demand for Healthcare products. The company subsequently sold its semiconductor business to private equity companies for nearly $3 billion. The company also sold off its Healthcare and medical products divisions to Phillips Medical Systems for $11 billion. The dual-sales effort was part of a strategic decision to concentrate more fully on the laboratory test/measurement business.
Since 2010, the company has grown its core business line through both innovative product offerings and strategic M&A activity. Luxcel Biosciences, Lasergen, ProZyme, Genohm and Advanced Analytical Technologies are just some of the acquisitions the company has made in 2018 alone. Clearly, management has a growth strategy predicated on purchasing strong, nascent companies that enhance the product line and help attract and retain customers.
Competitive Analysis. Healthcare is a vast sector, with many large subsectors full of competing organizations. As a laboratory workflow manufacturer, Agilent occupies one of the more niche areas of Healthcare. Prominent and publicly-traded competitors include Thermo Fisher Scientific, Abbott Labs, Bruker Corporation, Shimadzu, ULVAC Technologies and Bio-Rad. Thermo Fisher and Abbott are by far the largest players in the space, with 70,000 and 100,000 employees, respectively. Thermo Fisher has a $130 billion valuation, and Abbott has a $150 billion valuation. By comparison, Agilent has about 16,000 employees and is valued at $26 billion.
That said, Agilent is the third-largest player in the space. It’s worth noting that both Abbott’s and Thermo Fisher’s revenue and net income have been soaring over the past couple of years. Abbott’s revenue rose 50% from 2017-2019, to $31 billion, and net income rose from $480 million at the start of 2018 to $2.4 billion at the beginning of 2019. Thermo Fisher’s revenue grew 30% in the two years from 2017-2019, and its net income rose 50% during that same time, to $3 billion.
The revenue and net income growth of the two major players in the space is a strong sign for the broader laboratory workflow sector, as it implies a robust demand for the products and services that the sector provides. Also, a rising tide lifts all boats, and as the third-largest ship in this ocean, Agilent is poised to benefit from both Abbott’s and Thermo Fisher’s rapid growth.
Financial Analysis. Agilent has strong financials. 3Q19 (which was the company’s fourth quarter) came in robust, with revenue of $1.3 billion up 6% YoY. Earnings were almost $200 million. Fiscal year revenue of $5.2 billion grew 5% YoY, and EPS of $3.37 was up a whopping 250% YoY. The company is guiding next year’s fiscal year revenue at 4-5% growth once again, and earnings guidance is expected to tick up slightly, as the company ramps up its M&A and sales and marketing efforts to continue to grow.
The company has a market cap of $26 billion, with cash of $1.4 billion and debt of $2.4 billion. That’s not bad for a Healthcare company, which generally assumes high levels of debt. All that cash has come by way of the company growing earnings at an average clip of 17% per year over the last three years. Revenue has been growing at 8% over that same time frame, and management has done an excellent job of keeping operational costs down.
Stock Performance. The stock has performed in-line with the broader market this year, up 27% YTD. The 1% annual yield puts it right on the S&P’s YTD return. The stock is currently at its all-time high. Yet this is clearly the brightest point in the company’s history, as Agilent spent a good chunk of years disposing of underperforming business lines and ramping its core laboratory workflow business. The company is in terrific shape today, and its spate of mergers and acquisitions illustrate the strong financial and fundamental position of the company. Management is dead-set on growth, and has the cash on hand to continue to fulfill its M&A strategy. The stock has reflected the excellent forward-looking prospects for this company.
Agilent is mainly held by institutional investors like T. Rowe Price, BlackRock, Fidelity and Vanguard. That’s a good sign, as heavy hitters in the Financial Analysis space are on board with the stock. The stock even got a boost recently when Bill Ackman’s Pershing Square announced a purchase of nearly 3 million shares, with the distinct possibility of future buy-ins. Ackman is a legendary hedge fund manager, so his investment into Agilent really means something.
BMR TAKE: Agilent is a growing company in a growing sector. The financials are strong, with solid revenue and earnings growth year-over-year. On top of that, management’s M&A strategy is accretive, and shows that the company is willing to improve its products and services by purchasing rising stars in the sector and absorbing them and synergizing the costs. The growth of both Abbott Labs and Thermo Fisher shows how popular the sector is, and what high demand exists for laboratory workflow companies – and that spells great news for the third-largest player in the space, that continues to make proactive strategic growth decisions.
What’s more, the recent investment by Bill Ackman, which only adds to the laundry list of institutional brand names aboard this stock, signals confidence by some of Wall Street’s best investment professionals. While not a reason to invest in a stock alone, it’s good to know that major hedge funds and investment firms are participating in the Agilent growth story.
Management has steered this company through some tough times, disposing of key business lines, reducing staff, and guiding the company through the pressure of a low-demand climate. Demand for laboratory services is growing, and management is intent on growing the company to take advantage of the boom times. We’re expecting big things from this stock next year as a result.