Agilent Leveraged To Post-Pandemic Recovery And Advanced Drug Discovery And Production

 

You don’t go to the life sciences space looking for conventional bargains – it’s a high-growth, a high-margin sector that has attracted a lot of investor attention and the valuations reflect that. For investors who can get comfortable with the higher multiples, though, I do think there are some interesting stories, and Agilent (A) is one of them.

With research labs still operating well below normal and other end-markets like Chemicals and Energy likewise below historical norms, I see worthwhile upside for Agilent on post-pandemic normalization. I also like the company’s leverage to increased service penetration with its laboratory customer base, as well as the growth opportunities in biological drug discovery and production.

 

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Agilent Leveraged To Post-Pandemic Recovery And Advanced Drug Discovery And Production

Danaher's Pall Investor Meeting Underscores Several Business Strengths

In isolation, Danaher’s (DHR) investor day focusing on the Pall operations doesn’t really change anything about the story. What I believe is more important, though, is what the presentation reveals about the company’s much-lauded Danaher Business System (or DBS) and its ability to drive value from M&A.

With Danaher successfully integrating and improving companies across the range of revenue growth and R&D intensity, I believe Danaher has a compelling case for how and why it can continue to buy companies (particularly in life sciences and diagnostics) at seemingly high valuations and still generate value from the process and capital invested.

Danaher’s life science opportunities are significant, and I see no reason to believe that the company is looking at any significant near-term issues in the water or product ID businesses. Management was actually more optimistic than I expected on conditions in the semiconductor sector, and the company is leveraging its pricing power and supply chain flexibility to minimize the disturbances from tariffs.

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Danaher's Pall Investor Meeting Underscores Several Business Strengths

PerkinElmer Riding A Strong Cycle And Making Positive Long-Term Shifts

These are good times for PerkinElmer (PKI). The life sciences/pharma tool market is about as strong as it has ever been, and the company's pivot toward diagnostics and services should pay off in the years to come in the form of more revenue stability and better margins. If management can reverse a pretty uninspiring historical trend of underwhelming M&A integration and missing long-term revenue and margin targets, the future could be pretty bright for this company.

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PerkinElmer Riding A Strong Cycle And Making Positive Long-Term Shifts

While Performing Well, The Expectations Around Agilent Are High

I was skeptical about Agilent's (NYSE:A) prospects for outperforming its peers back in the summer of 2015, but since then, Agilent shares have comfortably outperformed peers like Waters (NYSE:WAT), Thermo Fisher (NYSE:TMO), PerkinElmer (NYSE:PKI), Bruker (NASDAQ:BRKR), and Shimadzu with a 30% run that has also handily beaten the S&P 500. Management has done a better job than I'd expected of improving margins and streamlining/refocusing the business, and Agilent has also done better than I'd expected in the pharma space on the back of a strong liquid chromatography product cycle.

At the risk of sounding like a broken clock, the valuation on the shares still concerns me. The new (and improved) Agilent has been generating FCF margins in the mid-teens and while I think management can deliver upside on operating margins and asset efficiency, I'm not sure that meaningfully exceeding 20% FCF margins is highly likely. So while I do think Agilent is a good company in the life sciences tools space (and performing well), it's hard for me to get comfortable with a valuation that already assumes double-digit long-term annualized free cash flow and/or a forward EV/EBITDA multiple more than twice the likely growth rate over the next three to five years.

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While Performing Well, The Expectations Around Agilent Are High

Seeking Alpha: Newly Agile Agilent May Yet Be Weighed Down By Expectations

The life science tools market doesn't offer quite as much organic growth as many investors seem to think, but the high barriers to entry, relatively short product cycles, and consumables/service streams do tend to support good margins for the established players. The question facing Agilent (NYSE:A) isn't so much about whether the company can remain a strong player in markets like separation, mass spec, and pathology, but rather whether the company can reverse a long history of failing to live up to expectations and truly make the most of its technology and market positions.

At this point I'm a skeptic. Agilent shares may hold some appeal if you believe they can generate Waters-level (NYSE:WAT) FCF margins relatively soon, but I consider that to be a very ambitious expectation. Likewise, I'm a little concerned about the company's relatively weaker position in clinical markets next to Waters, Thermo Fisher (NYSE:TMO), Danaher (NYSE:DHR), and Bruker (NASDAQ:BRKR). Although I have little doubt that Agilent as a company will be fine, I'm concerned that there's too much optimism in the shares now that Agilent operates as a pure-play on life science and science tools.

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Newly Agile Agilent May Yet Be Weighed Down By Expectations

Seeking Alpha: MOCON Has Some Headwinds For 2015, But A Good Underlying Business

I continue to believe MOCON (NASDAQ:MOCO) is an interesting, albeit very small and illiquid, play on the growth of the food and beverage industry with a kicker from newer ventures like energy and environmental testing. As a large amount of the company's revenue comes from Europe, this could be a more challenging year due to currency headwinds and the meltdown of the oil/gas sector is not going to help the company's efforts to grow its well logging business. Even so, I believe those challenges don't derail the long-term story.

It's worth saying again that this is very much a below-the-radar stock. The daily volume may be challenging for individual investors and is virtually a no-go for institutions. Likewise with the sell-side - there's no real money to be made making a market in these shares, so there's no coverage today and no reason to expect any in the near future. Even so, I believe the shares ought to trade in the low $20's on the basis of low-to-mid teens growth over the next five years and mid-to-high single-digit long-term growth.

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MOCON Has Some Headwinds For 2015, But A Good Underlying Business

Seeking Alpha: FEI Company's Retreat Not Quite Enough

I have a feeling that FEI Company (NASDAQ:FEIC) is going to be the sort of stock that adds to my collection of grey hairs. There's not a lot to criticize in terms of the quality of the company - it has built leading share in electron microscopy with a broad range of offerings (scanning electron, transmission electron, dual-beam, fixed ion beam, et al) and has made a point of using innovation and product development to essentially create new market opportunities for its technology. Margins are pretty good and the company has put together a solid recent run of annual returns on invested capital.

The issue, then and now, is price. I thought FEI Company looked too pricey in February and the market did punish the company for consecutive cuts to sales guidance, but it's not exactly cheap yet. On the other hand, quality scientific equipment companies don't often trade at bargain prices and FEI Company is looking at multiple growth opportunities across its end markets. I'm inclined to maintain "price discipline" here and wait for a better price/value trade-off, but I won't be surprised if a strong third quarter (a beat-and-raise) sends these shares back into the high $80s or above.

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FEI Company's Retreat Not Quite Enough

Seeking Alpha: Mocon Has An Interesting Energy Angle, But Watch The Margins

Micro-cap measurement and analytical tools company Mocon (NASDAQ:MOCO) hasn't done all that well since I wrote about the company in January of this year. It's always hard to know what moves trading on illiquid stocks that are not followed by analysts (seriously, no sell-side analyst follows Mocon), but relative to my own model the company has been disappointing with respect to sales growth, gross margin, and operating margin.

I'm still bullish on this company. The company has been communicating more clearly about its opportunities in energy and other "industrial" markets like water and air quality, and food contamination issues have stayed in the news. It takes patience and a larger appetite for risk to hold stocks like Mocon, but between its standalone prospects and potential appeal to an acquirer I think this is still a company worth a reader's time and due diligence.

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Mocon Has An Interesting Energy Angle, But Watch The Margins

The Motley Fool: Heavy Static At Danaher Corporation

"What we've got here is ... failure to communicate," Cool Hand Luke.

As one of the best-loved conglomerates out there (and seldom a cheap stock as a result), Danaher (NYSE: DHR  ) operates to a different set of Wall Street expectations than most companies. In the case of second quarter earnings and forward guidance, disappointing results in the volatile test & measurement business not only sent the stock down but will likely renew calls for management to consider breaking up the company. Perhaps adding a bit of irony to that, analysts also continue to express frustration that Danaher isn't making bigger splashes with its M&A efforts.

Danaher is Danaher, and the company will be fine. The diagnostics business is getting stronger and operations like water quality/treatment have strong growth potential in markets like China and India. Though I can't say that the shares have reached a bargain price yet, this may be a name to add to the watchlist in case the disappointment coming out of this quarter leads to a more pronounced skid.

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Heavy Static At Danaher Corporation

The Motley Fool: Even With A Change At The Top, Danaher Corporation Will Roll On

Multi-industry conglomerate Danaher (NYSE: DHR  ) definitely buried the lede this quarter, as news of the unexpected retirement of well-liked CEO H. Lawrence Culp next year overshadowed an otherwise "OK ... but not great" quarter. Losing a good CEO is also a risk for a company, but Danaher is a consummate example of a company that reloads instead of rebuilds. These shares are not particularly cheap and they rarely ever are, but an overreaction to this news could perhaps create a window of opportunity.

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Even With A Change At The Top, Danaher Corporation Will Roll On

The Motley Fool: What You Need to Know About the Agilent Technologies Split

There is no shortage of data, analysis, and opinion out there about the virtues (or lack thereof) of spinoffs and corporate splits. They don't always work, but I do believe that Agilent (NYSE: A  ) will be one of those companies that benefits, as there really never were meaningful synergies or counter-cyclical offsets between the test and measurement operations and the life science tools and diagnostics operations. Agilent still looks a little undervalued today and even with the added cost burden of the split, the life science and diagnostic operations in particular look well worth following.

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What You Need to Know About the Agilent Technologies Split

Seeking Alpha: A Focus On Margins And Clinical Opportunities Could Transform Bruker

Due in no small part to the willingness of large life sciences companies to grow by acquisition, there are not all that many small-to-mid cap companies with solid technologies, products, or market shares. Bruker (BRKR) is definitely one of the outliers, as the company has established a significant presence in areas like nuclear magnetic resonance, molecular spectroscopy, and advanced X-ray technologies.

Bruker has historically been more focused on product development and revenue growth than profitability, but that has started to change. The company has also started to alter its end-market focus, with clinical microbiology emerging as a very worthwhile opportunity. Bruker certainly has to prove that it can execute, and competing with companies like Agilent (A), Danaher (DHR), and Thermo Fisher (TMO) is no picnic, but Bruker seems to offer some appealing growth potential. The valuation isn't a slam-dunk at today's price, but there are definitely some bull-case drivers that could emerge to propel even better sales and margin performance down the line.

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A Focus On Margins And Clinical Opportunities Could Transform Bruker

Seeking Alpha: Tiny MOCON Worth A Little More Attention

I like under-followed companies, and it's hard to be much less followed than MOCON (MOCO). This small analytical/measurement tools company is passingly similar to larger scientific tools makers like Agilent (A), Thermo Fisher (TMO), and Waters (WAT), but MOCON is largely focused on gas/vapor permeation instruments and packaging testing for the food, beverage, pharmaceutical, and consumer goods sectors.

On first blush, MOCON may not seem to be worth the work. There are no sell-side analysts following the stock, and the low volume and float will have it stricken off the list of many would-be institutional holders. A trailing P/E of nearly 24 and EV/EBTIDA of more than 10 also don't look cheap at first glance, though I believe a free cash flow approach suggests a fair value north of $20. Provided the company can stay on track with its margin improvement efforts, I like the long-term outlook for this tiny instruments company.

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Tiny MOCON Worth A Little More Attention

The Motley Fool: Waters Corporation: Picks And Shovels Don't Always Sell Cheap

Life science tools companies like Waters Corporation (NYSE: WAT  ) , Thermo Fisher Scientific (NYSE: TMO  ) , Agilent (NYSE: A  ) , and Danaher (NYSE: DHR  ) are often described as "picks and shovels" plays on pharmaceuticals, biotech, and specialty chemicals, as these companies sell to a wide range of companies in those industries and have far less of the development risk or regulatory burden. True as that may be, these companies don't often trade cheaply and Waters is no exception.

Even though the Street has grown concerned about Waters' organic growth, these shares continue to trade at a double-digit EV/EBITDA multiple, a 50% premium to the company's expected growth over the next few years. Waters should see improving demand from the pharmaceutical space as clients work through R&D restructuring programs and Waters is well-positioned in emerging markets. There is also the possibility that a change in management (the company is searching for a new CEO) could bring with it a new approach to acquisitions. Even with that, though, it would seem that investors are not likely to see double-digit appreciation from today's price level.

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Waters Corporation: Picks And Shovels Don't Always Sell Cheap

Seeking Alpha: Waiting For The Next Pullback At FEI Company

Writing about FEI Company (FEIC) is a mixed blessing in some respects. While I really like what this leading microscopy company is doing, the nearly 400% appreciation in the stock over the past three years easily lends itself to "If you're so smart, why didn't you own it?" catcalls from the peanut gallery.

Putting that aside, I continue to be very bullish on the company's business prospects in the coming years. Not only is the company rolling new products with enhanced capabilities that could significant expand its addressable revenue potential, but management isn't losing sight of its operating responsibilities in the pursuit of more growth. Although FEI Company is more cyclical than some investors may like from a growth company and it doesn't look particularly cheap at first glance, this is a stock that I'd keep an eye on in the hopes of adding shares on a pullback.

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Waiting For The Next Pullback At FEI Company

Investopedia: Agilent Grinding Through Challenging Market Conditions

It may not look like it on the basis of the last few quarters, but Agilent (NYSE:A) is getting better. Weakness in multiple test and measurement end-markets and lower government spending are generating stiff headwinds, but the company continues to roll out strong new products, and the long-term potential in chemical analysis and diagnostics remains impressive. Even though Agilent is near a 52-week high, I believe shareholders could still do reasonably well with this stock, particularly if their investment horizon is more than just a quarter or two.

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Investopedia: Agilent Isn't Making It Easy On Investors

It's getting harder for me not to view Agilent (NYSE:A) as something like the store-brand version of Danaher (NYSE:DHR). It's cheaper and pretty close to the real thing, but it's just not quite the same and sometimes those differences leave you walking away unsatisified. To be sure, I think Agilent could do a lot to close this gap, but I'm not sure they will. Consequently, while Agilent is a little bit undervalued, it's harder for me to be as enthusiastic about buying shares today – particularly when Danaher seems undervalued to a similar degree.

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Seeking Alpha: Thinly-Traded Edwards Group Could Outperform On Semi Equipment Pickup

When it comes to companies tied to the semiconductor capital equipment cycle, talking about valuation often feels pretty pointless. Creating accurate long-term models is a Sisyphean task, and the realities of the market mean that the stocks often go much too low in the bad times and much too high in the good times. With that in mind, then, Edwards Group (EVAC) doesn't necessarily jump out as a screaming bargain today, but I suspect that a recovering in the cyclical semiconductor, panel, and LED markets will lead to significant stock performance for a year or two.

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Thinly-Traded Edwards Group Could Outperform On Semi Equipment Pickup

Seeking Alpha: If Agilent Weakens Further, Take Advantage Of It

As a high-quality company with strong share in most of its addressed markets, Agilent (A) doesn't frequently get all that cheap. The initial reaction to a weaker-than-expected fiscal first quarter has been pretty restrained as of this writing, but investors may want to sharpen their pencils and get ready to move on this name. Agilent has cyclical volatility and exposure to weaker government spending, but represents a good quality growth name at the right price.

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If Agilent Weakens Further, Take Advantage Of It

Investopedia: Pricey Today, IDEX Deserves A Spot On Watchlists

The recent strong performance by the stock markets has reduced the number of appealingly priced stocks to choose from these days. That certainly fits IDEX (NYSE:IEX), as this mid-cap industrial conglomerate has ridden a one-third move in its stock price to a recent new 52-week high. Although not so expensive that it's a short or a must-sell, patient investors may want to relegate this name to a watch list. The company's deep customer relationships and diverse industrial exposures are attractive, but not necessarily at today's valuation.

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