Agilent Technologies isn't one of tech's glamour queens. But its solid businesses and strong outlook make its shares enticing.
TEST AND MEASURE, MEASURE AND TEST. THAT COULD BE THE MOTTO of Agilent Technologies' business, as well as its management philoso phy.
Agilent (ticker: A), the top producer of testing equipment for the elec tronics and biotech industries, has honed its focus since it was spun off by Hewlett-Packard (HPQ) in 1999. Though HP's roots lay in electronic-test ing geal; Agilent was viewed as an expendable grab-bag of ancillary busi nesses.
Today, through several divestitures and a pending spinoff, Agilent consists of two divisions, electronic measurement and bio-analytics, serving lal'ge markets in the wireless-communications, chemical and life-sciences industries. The company is in several nicely growing, less cyclical businesses, governed by a stated management goal of achieving a 20% return on invested capital over an economic cycle.
Agilent generates impressive wads of cash, which along with it~ deal proceeds, should help it repurchase $2 billion worth of its shares over the next two yeal's-a sizable chunk of its current $14 billion mal'ket value. This comes after a $4 billion buyback in the past two years. Agilent shares are roughly nat on the yeal', at about 34.81, but they' have rebounded from a summertime low around 27.
Given Agilent's strong free CCl.'Jh flow of $750 million, and earnings that ' could approach $2 a share in fiscal 2007 (ending October), the company's stock could rise 15% or more, based on the cash-flow and earnings valua tions of peers such as Tektronix (TEK) and Thermo-Electron (TMO).
Investor-relations chief Hillial'd Terry says Agilent's goal is to pro duce average annual revenue growth of 10% through new-product intro ductions, market-shal'e gains and acquisitions. That would trump the overall market's typical 6% yearly sales gain.
While not ten'ibly cheap at more than 18 times expected fIscal 2007 earnings, the stock could enjoy multiple expansion over time as the Palo Alto concern continues increasing margins by outsourcing manufactm'ing, shrinks its share base, trims inventories and acceler ates receivables collections. Other companies in this steady, high-re turn industry routinely sport premium valuations.
Agilent's long-running restructuring involved selling some $3.7 bil lion of non-core units, including its semiconductor-products division. The company also took public Verigy (VRGY), its chip-testing arm, over the summer, and will distribute its remaining stake to Agilent sharehold ers Oct. 31. The Verigy stake is worth about $2 per Agilent share. Only Agilent holders of record on Oct. 16 will receive Verigy shares.
Newly streamlined, Agilent's challenge is to build upon its leading mar ket positions. The company's single largest market is wireless communica tions. Among its priorities is to increase its high-tech defense and aero space sales.
Bio-analytics is a faster-growing business with higher retm'ns, serving pharmaceutical, genomics and chemicals customers. Companies in this area tend to garner higher stock-market multiples, so Agilent's goal of accelerating growth here, in part through acquisitions, also should boost its valuation over time. The company has extraordinary geographic bal ance, with 40% of its sales in the Americas, 36% in Asia and 24% in Europe.
The risk that Agilent might deploy some of its growing free cash flow into expensive or risky acquisitions may worry some investors and analysts. But Terry says: "The most important thing is that acquisitions not destroy shareholder value. Om' sweet spot is smaller, gap-filling technology acquisitions."
Wall Street is somewhat lukewarm on the stock, with five Buy ratings and five Holds, and an average price target of 37. This should cheer contrarians. One fan, Robert W. Baird analyst Richard East man, thinks Agilent eventually might initiate a cash dividend to go with its large repurchase program. He has a conservative target of 39 on the shares.
Not much about Agilent sounds dazzling, but therein lies its quiet appeal. Rather than betting on which new gizmo or highly-touted drug might be a blockbuster, why not bank on the company that sells technol ogy prospectors vital tools? That's a thesis you can test-and measure .•
By Michael Santoli
