2023-07-17 06:55:06 ET
Summary
- Agilent Technologies share price is down from its 52-week high of $160, but its Q2 results and a forward P/E of 21 make it an attractive buy.
- The company has announced its 10th consecutive annual cash dividend and is appealing a decision on CRISPR gRNA patents, which could boost its share price.
- Agilent stock has a solid capital deployment program, with $4.4 billion worth of shares repurchased since 2015 and $1.6 billion distributed as dividends; it also announced a $2 billion buyback plan.
Investment Outline
I have been covering a few different companies operating in the healthcare sector since I start publishing here on Seeking Alpha. The sector seems to have seen a steady decline as more and more capital is being rolled over into tech companies. But that often leaves a lot of potential to pick up companies at discounts.
The share price of Agilent Technologies ( A ) is down a fair bit from the 52-week high of $160. Trading at an FWD p/e of 21 makes it appealing right now, especially when seeing the Q2 results from A highlighting the continued operational excellence in Chemicals and Advanced Materials. Rating Agilent a buy.
Recent Developments
In recent news from Agilent, they have announced another cash dividend for investors. 22.5 cents per share is the decided amount and this marks the 10th consecutive year that A is paying out a dividend to its shareholders. More to come I think. All shareholders on record from 3 July will be receiving the dividend. With that, the company currently has a yield of 0.75%, which doesn't necessarily make it a heavyweight dividend addition to a portfolio. But still, a sound addition when seeing the 5-year growth rate for the dividend has been 8.86%. The payout ratio is just over 15% and I think we are likely to stay within this range. Agilent operates in a $68 billion market where the necessity to invest in new products trumps the need to have a high payout ratio I think.
Apart from the dividend announcement, Agilent is also appealing the decision on CRISPR gRNA patents. The argument from the side of A is that making the technology patentable is very much possible. In my opinion, its groundbreaking work and Agilent was early on with it. A positive win here for the company would most likely be a tailwind for the share price as the company would get asserted as a significant player in the space.
Margins
In my view, the margin profile for A right now is a real highlight and the result of efficient product development and expansion into growing markets.
Margin Profile (Seeking Alpha)
The one margin here that is still below the historical average is the FCF margin. I do expect it to rise eventually as the company is able to capture the strong demand they are seeing from the Chinese market. Agilent is a company providing solutions for life sciences, diagnostics but also applied chemicals. The Asian market is growing increasingly quickly now and I think if Agilent can capture a fracture of it, it will lead to a stronger margin throughout business. The company has been focusing on its " Build and Buy " strategy to fuel growth, which seems to be working. Nearly 40% of the revenues comes from Asia which will be a significant supporting matter for the future of Agilent.
Value For Investors
Investors shouldn't be investing in Agilent solely for the dividend in my opinion. The yield is below 1% which doesn't constitute the company as a dividend investment in my opinion. Rather it's still in a growth phase where steady revenue increases are prioritized. But it does maintain a very solid capital deployment program which has resulted in $4.4 billion worth of shares being repurchased since 2015 and $1.6 billion has been distributed as dividends in the same period. Earlier in 2023 Agilent has also authorized a new buyback plan valued at $2 billion, which would reduce the outstanding shares by over 5%.
Valuation
Future Estimates (Author)
With a business as solid as Agilent I think it often comes with a higher premium attached to it. For future estimates, I am applying a 22x multiple to the earnings. Still is a fair bit below the 5-year historical average the company has had, which is 27x instead. For my liking, that is too high to pay, even for some of the best businesses out there. An 8% EPS growth seems reasonable going forward, which should be helped by the buyback programs the company has announced, limiting the number of outstanding shares. The 10-year historical EPS growth for A is 4.66% , but as momentum is growing in key markets like Asia I think higher predictions can be made going forward. For investors seeking a company that has a sound balance sheet and a valuation that doesn't scream overvalued, I think Agilent is worth a look. A decent return can be made on investment here, and if we see stronger cash flows, perhaps a higher dividend yield could also be seen as realistic.
Risks
With a diverse set of geographical markets the company generates its revenues, they are forced to battle unpredictable expenses that currency fluctuations bring with it. Much of the revenues come from Asia and Europe. Thankfully the volatility between the EUR and USD is seemingly lower recently which should make earnings a little easier to predict going forward.
Investor Takeaway
Going with the most established companies in an industry is usually not such a bad option. Agilent was founded back in 1999 and has grown into a superpower in the life science tools and services industry, boasting a market cap of $35 billion. Growth isn't stagnating, but perhaps not as high as to say Agilent is a growth opportunity for investors. Rather I view it as a solid addition to a portfolio seeking a different exposure instead of going with Johnson & Johnson (JNJ) or UnitedHealth Group Incorporated (UNH). A large buyback plan was announced back in early 2023. That paired with growing demand in the Asian market makes Agilent a solid buy now.
For further details see:
Agilent Technologies: Solid Operational Performance Paves The Way For The Future