About the best thing I can say about my bullish call(s) on Agilent (NYSE:A) is that owning its shares hasn't hurt you too badly in 2012, as the stock has lagged the S&P 500 by about 7% for the year so far and actually outperformed (slightly) over the past quarter. While the company's guidance for 2013 was not very compelling, I continue to believe that Agilent offers a good collection of businesses with ongoing growth potential, as well as longer-term margin and free cash flow (FCF) leverage. The question is whether or not investors can afford to be patient while that long-term thesis works itself out.

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Ending the Year on a Good Note ...
Despite relative sluggish performance from a variety of comps including Danaher (NYSE:DHR) and Life Technologies (Nasdaq:LIFE), Agilent basically got the job done for its fiscal fourth quarter. Revenue rose 2% as reported, but declined 1% on an organic basis. Electronic Measurement was the underperformer again, as revenue fell 5% on a continued slowdown in communications. Chemical Analysis declined 3% from last year, helped by an increase in sales to the forensics market. Life Sciences ended the quarter flat, while Diagnostics and Genomics rose 1% on an organic basis.

Margin performance was pretty solid at Agilent. On an adjusted basis, the company reported better than a half-point improvement in gross margin, while adjusted operating income rose 2% and the company squeaked out a higher operating margin despite increased SG&A and R&D spending.

... Sort of
Although Agilent's quarter came in pretty solid relative to expectations, the company's order trends and guidance were not as encouraging.

Orders declined 3% on an organic basis, with an 8% drop in EMG orders leading the way down. Only the D&G group saw a year-on-year improvement, though Life Sciences and CA did improve on a sequential basis and the book-to-bill improved slightly as well.

Agilent management has something of a reputation for conservative (or at least credible) guidance, so its comments after this quarter were a bit concerning. For the year ahead, it is looking for organic revenue growth of just 1.5%, with higher compensation expense pointing to an EPS target about 12% lower than the prior average analyst estimate. Keep in mind, too, that that assumes that the fiscal cliff issues get resolved and that China recovers later in the year, so there's arguably still some risk in those numbers.

SEE: Can Earnings Guidance Accurately Predict The Future?

Still a When, not if, Story?
2013 is increasingly looking like a tough, muddle-through sort of year. Said differently, if 2013 ends up being strong, it will come as a surprise to the managers of companies such as Danaher, Illinois Tool Works (NYSE:ITW), Dover (NYSE:DOV) and Life Tech.

For Agilent in particular, a recovery in the semiconductor industry would be a big help, as would a pick up in carrier telecom equipment spending. While I don't see government research budgets swelling (bad news for Life Tech and Illumina (Nasdaq:ILMN) as well), Agilent's more significant leverage to markets such as pharmaceuticals, energy, forensics and food/beverage should help offset that to some degree. On the diagnostics side, I think Agilent investors need to continue to look at Dako as a long-term fix-er-up opportunity on par with Danaher's acquisition of Beckman; in other words, Dako won't save the day in 2013.

All of that said, I continue to believe Agilent is in the right markets for long-term growth. Electronic test and measurement is a cyclical industry, but one that should continue to cycle upwards. While Chemical Analysis, Life Sciences, and Diagnostics may be a little more sedate, I do believe they'll provide above average long-term growth and margins that will be quite beneficial to Agilent's cash flow.

SEE: A Look At Corporate Profit Margins

The Bottom Line
All in all, then, the Agilent thesis is similar to what it has been for a couple of quarters now - the stock is undervalued on a long-term basis, but has enough short-term challenges that the stock may be hard-pressed to outperform. High single-digit free cash flow growth should be attainable, and if the company can do so these shares ought to trade closer to $50.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

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