The News Issue Week Day

RICH AMERICA, POOR AMERICA The split nature of today's economy has been great for stock like Coach, tough for ones like Wal-Mart. Why that won't change much, even as the Democrats gain clout in Washington. he New IBM

Big Blue's shareholders have been blue for the past few years. But the tech giant has a new strategy, focused on software. Best of all, it's working.

Randall Forsyth The buck may be real loser in Iraq ...

Review&Preview A vote keeps ASMI intact. Going more nuclear ...

Storming Ahead, After run-up, a few insurers look good ...and Direct TV

Smooth Style Polo stock will stay in fashion ...

Follow the Leaders Copying smart stockpickers is one way to build a best-ideas portfolio, and it saves on management fees. A look at Oracle, Sears, AutoZone,Wendy's and other top holding of five closely watched hedge funds ...

Coming Spinoff Duke Energy's powerful idea ...

The New Big Blue Cover Story: IBM investors may soon be smiling like CEO Palmisano, as Wall Street comes to realize that Big Blue's reinvention as a software giant gives it a steadier, more profitable business with plenty of potential for further improvement ...

Spreading Joy The four rules of good giving ...

Technology Trader Microsoft stock could be ready for takeoff, now that new version of Vista and office have launched ...

13 Great Gadgets Our pick for sleek and sophisticated gadget gifts include Sony TAV-L1 all-in-one home theater, a digital SLR camera, Logitech's Harmony 1000 universal remote ...

Friday

Measuring Up


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

Complete Archive Desember 2006

The New Cisco As technologies like Internet video take off, Cisco Systems, the king of computer networking, will be among the biggest winners. Why its shares could rally another 15%.

Survivor! GOP Will Hang On Despite a profusion of predictions to the contrary, the Republicans will keep control of Congress through just barely. So says our highly reliable seat by seat analysis of local political funding.

The New IBM Big Blue's shareholders have been blue for the past few years. But the tech giant has a new strategy, focused on software. Best of all, it's working.