Agile Agilent

Agilent (NYSE:A) has always been something of an odd one out. Although the company boasts a market capitalization of approximately $10 billion, Agilent is relatively under-followed and often overlooked. Some of that is because of the unusual collection of businesses. The company has historically derived about half of its revenue from electronic test and measurement equipment and the other half from biological and chemical analysis equipment, and few analysts have expertise in both of those markets. What may be Wall Street's pain can be a motivated investor's gain. Because Agilent does not get the close scrutiny of other names, and because there is not a small army of analysts flogging the stock to institutional clients, investors can occasionally pick these shares up on the cheap.

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The Quarter That Was
Agilent's fiscal third quarter was a solid performance. Reported revenue rose 31%, while organic revenue growth was more on the order of 24%. While the company's biological and chemical analysis segments got a boost from the Varian acquisition, organic growth of 15% and 13%, respectively, was still solid. Even better, though, was the performance of the electronic measurement business where organic revenue growth was on the order of 34% (excluding a divestiture). Better still, the company's book-to-bill is positive, as orders rose 39% on a reported basis and 30% on an organic basis.

Although the company did not perform quite as well relative to expectations below the top line, the performance was still solid. The company's gross margin rose nearly three full points to 56.1%, while the operating margin more than doubled from the year-ago period.

The Road Ahead
Electronic test and measurement is a cyclical business, but there is some hope that the cycle is now pointing up. Agilent has strong share in the global WiMax and LTE test markets, for instance, and should benefit from upcoming launches from companies like China Mobile (NYSE:CHL), TeliaSonera, and Verizon (NYSE:VZ), though competitors like Danaher (NYSE:DHR) and JDS Uniphase (Nasdaq:JDSU) are not going to just cede business to Agilent.

Longer term, the company's increasing exposure to bio-analytical markets should reduce volatility and improve returns on capital. There is stiff competition here from the likes of Life Technologies (Nasdaq:LIFE), Thermo Fisher (NYSE:TMO) and Waters (NYSE:WAT), but Agilent has held its own over many years. Although Agilent does have a collection of mature businesses in this segment (like gel electrophoresis and PCR), there are above-average growth prospects in categories like microarrays and lab automation.

The Bottom Line
Whether it is due to being overlooked and hard to categorize (again, half of the business is electronic test/measurement and half is life sciences), or due to cyclical worries about the electronics sector and funding conditions in the biological market, Agilent does not seem to have a challenging valuation today.

True, the company does not appear cheap on the basis of its backwards-looking fundamental ratios, but just as it is difficult to drive a car through the rearview mirror, it is difficult to successfully buy stocks looking backwards. Agilent appears poised to grow its profitable bioanalytical business while also leveraging an upswing in the electronic test/measurement market after some rough years. With growth and free cash flow leverage likely to improve, investors should give a serious look at this long overlooked tech company. (For more, see The Successful Investment Journey.)

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