National Instruments Looks Like It May Be Building Toward Something More Interesting

 

Opportunity is a tricky thing to evaluate with stocks, as opportunity without execution means nothing more than disappointment. National Instruments (NATI) has the opportunity to benefit from some strong secular trends in wireless and electric vehicles, as well as a shift in value within testing equipment from hardware to software. The company also has a significant opportunity to improve its operating cost efficiency and drive meaningfully better profit and FCF growth.

But will they? I think that’s the real crux of the investment debate on NATI right now. In wireless, millimeter wave (or mmWave) has been slow to catch on, and while NATI has built a differentiated software-based approach to testing, translating high gross margins into strong operating margins has been frustrating.

There’s definitely a bullish case here if you believe that the company’s efforts to reposition its go-to-market strategies will eventually drive operating margins closer to rivals like Keysight (KEYS) or Viavi (VIAV). Should the company come up short, though, the shares are likely to underperform.

 

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National Instruments Looks Like It May Be Building Toward Something More Interesting

National Instruments Looking To 5G, Autos, And New Strategic Priorities To Drive Better Results

 

The balancing act between past performance and future opportunities is a tricky one, particularly when a company is implementing new business strategies and/or seeing meaningful new end-market opportunities. If you drive solely by looking in the rear-view mirror (focusing only on what a company has been), you’re going to have some problems. If you ignore what’s in the rear-view mirror, you’re also going to have some problems.

Test equipment and instrumentation specialist National Instruments (NATI) is an interesting case in point. The historical performance is not that exceptional – mediocre revenue growth little better than GDP growth, consistently okay FCF margins but no upward trajectory, and a trailing stock performance record that is pretty lackluster next to the S&P 500, let alone rivals like Keysight (KEYS).

Now the question is whether the future will be different. End-market opportunities like 5G (particularly mmWave) and auto electrification and autonomous driving are meaningful potential growth drivers, but a lot of the business is still linked to general economic cycles (as measured by the PMI). A focus on increased system sales and software should drive better margins, but there’s a lot to prove beyond “should”. Allowing that National Instruments certainly has room to surpass my expectations, I think the shares are at best reasonably priced today.

 

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National Instruments Looking To 5G, Autos, And New Strategic Priorities To Drive Better Results

National Instruments Already Getting Ample Credit For What It Does Well

Although Wall Street often values companies on the basis of their perceived potential in the short term, it's typically a company's ability to execute that determines the long-term rewards for shareholders. That makes National Instruments (NASDAQ:NATI) a tough stock for GARP investors today; while the company's long-term revenue growth hasn't been bad, margin leverage has been elusive and returns on capital haven't been impressive. Making matters more complicated, the company's strong presence in software and its uncommon modular approach ought to be valuable points of distinction.

There are a lot of potential drivers that could lead to meaningful changes in National Instrument's future performance. The company is more aggressively targeting opportunities in semiconductor and wireless test, and the company's capabilities in embedded monitoring and control could leverage meaning growth in industrial IoT, autonomous vehicles, and other "smart machine" applications. Could is a tricky word, though, and a lot of improvement (and/or M&A potential) seems to be in today's share price.

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National Instruments Already Getting Ample Credit For What It Does Well

Fortive Ready For The Turn

Fortive (NYSE:FTV) has done pretty well since my last update on this (relatively) new industrial conglomerate, as the shares' 13% rise more or less matches that of 3M (NYSE:MMM) and stacks up better against the likes of Dover (NYSE:DOV), Keysight (NYSE:KEYS), and Illinois Tool Works (NYSE:ITW). While some of this performance is likely a byproduct of positive coverage initiations, Fortive has managed to continue generating positive core growth and looks well placed to leverage the nascent U.S. industrial recovery.

The fundamental story at Fortive hasn't changed all that much. This is a diversified industrial conglomerate that is run along the same principles as Danaher (NYSE:DHR); principles that include continuous process improvement and responsiveness to customer needs, as well as opportunistic M&A. I believe that Fortive can generate healthy mid-single-digit revenue growth with the businesses it has, particularly given efforts to improve and grow businesses like Tektronix and Kollmorgen, and acquire at least a few percentage points more from M&A. While the shares do not look undervalued, the implied high single-digit total return isn't so bad on a relative basis and Fortive looks like one of the better names to consider in an industrial sector that offers few obvious bargains.

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Fortive Ready For The Turn

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: 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: If The Economy Holds, Agilent Is A Buy

Put succinctly, Wall Street is still freaked out about the course of the global economy in 2012. As a result, a long list of companies are trading below what seems like a rational fair value, and Agilent (NYSE:A) is clearly among them. Although a further economic slowdown would be bad news for both the test and measurement and life sciences businesses, today's price seems to already factor in a lot of that risk.

An Unnerving Close to the Fiscal Year  
Although Agilent's reported results were not bad, it did give nervous investors an excuse to worry a little more. Revenue did rise more than 9% in the fiscal fourth quarter, but the growth rate came in a bit below the expectations of management and many analysts, even if that shortfall could be tied largely to forex moves. Growth was strongest in the electronic measurement segment (up 10% organically), decent in life sciences (up 6%) and sluggish in chemical analysis (up 1%).

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