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: MTS Systems Isn't Afraid Of Bold Expectations

For many companies, the role of CEO comes down to carefully massaging expectations such that institutional shareholders stay happy and stock options end up in the money. That sort of attitude doesn't lead to much in the way of boldness, and it probably goes some length to explain just why "average" performance is often so mediocre.

MTS Systems (MTSC) isn't like that, though. Management here has laid out bold targets - compound revenue growth of over 10% through 2018 and doubling revenue to $1 billion. Double revenue in six years would be aggressive for most companies, let alone a company that serves cyclical industries like autos and aerospace and competes with large companies like Illinois Tool Works (ITW) and Moog (MOG.A). While I'm not 100% convinced that management will hit that market (it's a goal, not a guarantee), I do believe that even a "near miss" would make these shares undervalued at today's price.

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MTS Systems Isn't Afraid Of Bold Expectations

Thermo Fisher Pays A High Price For Quality

Dionex (Nasdaq:DNEX) was on a lot of short-lists for potential life sciences M&A, and Thermo Fisher (NYSE:TMO) made that prediction a reality on Monday morning. Thermo Fisher, a large and diversified life sciences company announced that it was acquiring Dionex for $2.1 billion. 

Quality Does Not Come Cheap
Thermo Fisher is acquiring all of Dionex for $2.1 billion in cash, or $118.50 per share. That is a 21% premium to Dionex's price on Friday, and a healthy multiple for this niche company. Thermo is paying nearly five times trailing revenue and 20 times trailing EBITDA. That is well ahead of the current valuations for other niche analytical companies like Bruker (Nasdaq:BRKR), broad analytical companies like Agilent (NYSE:A), Waters (NYSE:WAT) and PerkinElmer (NYSE:PKI), and the acquiring company. In fact, investors pretty much have to turn to companies like Illumina (Nasdaq:ILMN) or Luminex (Nasdaq:LMNX) to see comparable valuations.

By the same token, there are plenty of reasons that validate that price tag. Dionex is one of the best companies in the sector in terms of ROIC and margins, and management have been very sound stewards of the company's capital. Where many companies fall all over themselves in trying to diversify and become a one-stop-shop for life sciences, Dionex has more or less stuck its specialty. That has allowed the company to build a 75% share in ion chromatography, while also building a decent (though small) high-performance liquid chromatography business. 


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