It may not look like it on the basis of the last few quarters, but Agilent (NYSE:A) is getting better. Weakness in multiple test and measurement end-markets and lower government spending are generating stiff headwinds, but the company continues to roll out strong new products, and the long-term potential in chemical analysis and diagnostics remains impressive. Even though Agilent is near a 52-week high, I believe shareholders could still do reasonably well with this stock, particularly if their investment horizon is more than just a quarter or two.
 
Fiscal Q3 Results Look Ugly
On an absolute basis, it's tough to sugar-coat Agilent's third quarter results. Revenue was very slightly above expectations, but still contracted 6% on an organic basis. That grim result was led by Electronic Measurement (EMG), where revenue fell 16% on an organic basis (and was still down 8% after adjusting for a large customer loss). Results were better on the other side of the fence, were both Chemical Analysis and Life Sciences delivered low single-digit growth (3% and 4%, respectively) and Diagnostics revenue rose 7%.

SEE: Earnings: Quality Means Everything
 
Non-GAAP margins and profits were under pressure, but came in okay relative to sell-side targets. Gross margin rose more than a half-point, while operating income declined 13%.
 
Still Waiting For EMG To Turn
This wasn't a great quarter for test and measurement companies like Danaher (NYSE:DHR), JDSU (Nasdaq:JDSU), and EXFO (Nasdaq:EXFO), but Agilent's performance was worse than the average. While the loss of that wireless test customer definitely hit results hard, the 11% decline in the computer and semiconductor markets was pretty painful as well. It does seem as though these businesses may be bottoming, though, and the company did see some growth in aerospace on strength in satellite components.
 
Government spending declines in the U.S. are also pressuring the life sciences and chemical analysis businesses. Academic/government spending was down 7% in part due to sequestration, but I think it's worth noting that others like Waters (NYSE:WAT), Thermo Fisher (NYSE:TMO), and Illumina (Nasdaq: ILMN) seem to be withstanding these pressures better. On the other hand, the company's relatively low exposure to academia and government is often cited as an investment positive, so I wouldn't read all that much into it for the long-term. Moreover, short-term disruptions need to be evaluated in the context of strong long-term opportunities in food safety, environmental and other markets.

SEE: 3 Secrets Of Successful Companies
 
Diagnostics Looking More Promising
Getting Dako back up to cruising speed is still going to take some time, but Agilent seems to be making good progress. Internal sales growth has been better than a lot of analysts expected at the time of the deal, and new products like an impressive autostainer suggest an opportunity to regain ground from others like Danaher and Abbott Labs (NYSE:ABT).
 
It's also worth noting that Agilent's potential in diagnostics isn't tied just to Dako. Technologies like mass spec are becoming increasingly relevant in the clinical diagnostic market, and Agilent not only has a good foundation in the hardware side, but also a realization that better software is going to be increasingly important as this market comes into its own.
 
The Bottom Line
With Danaher having outperformed Agilent over the last year and looking a little pricier relative to fair value, it may time to favor Agilent again. I believe Agilent can grow its top line by 4% or more over the long term, and improve margins to drive free cash flow growth of 7% or better. That translates into a fair value above $52.
 
Agilent isn't a dirt-cheap screaming buy, but the company has been doing better despite some pretty nasty headwinds outside of its control. That leaves me more confident that Agilent will come out of the turn with good momentum and the potential to exceed expectations.
 
Disclosure – At the time of writing, the author did not own shares of any company mentioned in this article.

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  10. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. Phenotype

    An organism’s observable characteristics or traits.
  5. Pharmacology

    The study of how drugs affect people. More formally, pharmacology ...
  6. Genomics

    The study of the genome, which is the complete set of the genetic ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!