It's getting harder for me not to view Agilent (NYSE:A) as something like the store-brand version of Danaher (NYSE:DHR). It's cheaper and pretty close to the real thing, but it's just not quite the same and sometimes those differences leave you walking away unsatisified. To be sure, I think Agilent could do a lot to close this gap, but I'm not sure they will. Consequently, while Agilent is a little bit undervalued, it's harder for me to be as enthusiastic about buying shares today – particularly when Danaher seems undervalued to a similar degree.

A Slightly Disappointing Quarter On Revenue, But Do Margins Salvage The Story?
Given what we'd already seen from companies in the test & measurement space (Danaher, National Instruments (Nasdaq:NATI), et al) and life sciences equipment (Waters (NYSE:WAT), PerkinElmer (NYSE:PKI), there was no reason to think that Agilent was going to have a great quarter, and the company certainly did not.

Revenue fell 4% on an organic basis, and missed the Wall Street average estimate by about half a percentage point. The company's EMG business (test & measurement) was notably weak, with revenue down 12% an on organic basis. The remaining businesses were stronger, though, with the diagnostics group (DGG) flat, life sciences (LSG) up 4%, and chemical analysis (CAG) up 5%.

While revenue was disappointing, Agilent did do well for itself with margins. Adjusted gross margin improved about 70bp from the year-ago level and beat analyst estimates by about half as much. Operating income did decline 1% and the margin slipped a bit, but the company beat expectations by a full two points on the margins.

Test & Measurement Goes From Bad To Worse
The entire test & measurement space is seeing challenging times, hurt by weak computing and semiconductor markets, uncertainties in defense, and slowing wireless device growth. Weak chip and computing customers certainly hurt Agilent this time around, but it looks like a large customer loss also hit results.

Agilent lost a one-box tester customer in wireless manufacturing that appeared to account for about $250 million in revenue – no details were provided, but Agilent rivals Teradyne (NYSE:TER), National Instruments, Anritsu, and Rohde & Schwartz all have a meaningful presence in this market. With this loss, as well as the aforementioned market weakness, orders plunged by about one-quarter.

Restructurings And Buybacks Don't Address The Bigger Issues
Offsetting the disappointing fundamental performance and soft outlook, management announced a doubling of the company's buyback (from $500 million to $1 billion) and a restructuring that will see 2% of the workforce fired.

I realize this is commonplace among U.S. companies now, but it still strikes me as little more than buying off shareholders. It doesn't help the 8% organic decline in orders, it doesn't help the so-far disappointing returns from the Varian deal, and it doesn't help a model that may be too heavily skewed towards capital spending (about 70% of the revenue business is instrumentation/capital equipment).

True, this was not great a quarter for Danaher and others in test equipment, and other life sciences equipment companies saw weak results. So, I don't want to hold Agilent up for any special scorn in that respect. What troubles me, though, is that Agilent doesn't have that focus on margin improvement, new product development, customer engagement, or value-added capital deployment that Danaher has. Maybe it isn't fair to compare the company to Danaher, and Agilent's returns on invested capital have been pretty solid, but I've been supportive of Agilent for a while now only to see a company that seems to more often than not come up just a little short of what it should be.

The Bottom Line
I've generally taken the position that investors should buy Agilent whenever they get a chance to buy it below fair value. I'm backing away from that slightly now – I'm not suggesting Agilent should be avoided, but I want a little more margin of safety to account for the unpredictability of results and the uncertainties I have about management's capital management priorities.

I'm still looking for mid-single digit long-term growth in revenue and free cash flow, and that's worth about $45 to $46 a share to me right now. That makes Agilent a marginal buy candidate today, and given that Danaher is undervalued by a similar amount (on similar growth assumptions), that may be the better pick. That said, for all of my complaints about Agilent not being great, it is still quite good and should do alright over the long term.

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