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Agilent Technologies Inc Fundamental Analysis

Disclaimer: This article by The Globetrotting Investor is general in nature. We aim to bring you long-term focused analysis driven by fundamental data, hence, providing you commentary based on historical data and analyst forecasts only using an unbiased methodology. This is not a buy/ sell recommendation, and it is solely for educational purposes. Please do your research before investing. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Please read the full disclaimer here.

Agilent Technologies Inc

Last Updated: 28 June 2023

NYSE: A

GICS Sector: Healthcare

Sub-industry: Diagnostics & Research

https://www.agilent.com/

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Table of Contents

You can download a summary of Agilent Technologies Inc's fundamental analysis in PDF here.

Management

Agilent Technologies Inc Management

CEO: Mike McMullen

Tenure: 8.8 years

Agilent Technologies’ management team has an average tenure of 8.1 years. It is considered experienced.

Source of Revenue

Agilent Technologies Inc Source of Revenue

Agilent Technologies, Inc. provides application-focused solutions that include instruments, software, services, and consumables for the entire laboratory workflow to the life sciences, diagnostics and applied chemical markets worldwide.

 

The company has three business segments: the life sciences and applied markets business, the diagnostics and genomics business and the Agilent CrossLab business.

 

Life Sciences and Applied Markets Business

The life sciences and applied markets business provide application-focused solutions that include instruments and software that enable customers to identify, quantify and analyze the physical and biological properties of substances and products, as well as enable customers in the clinical and life sciences research areas to interrogate samples at the molecular and cellular level. They also offer a wide range of consumables such as columns, sample preparation products, custom chemistries, and laboratory supplies. Agilent serves customers regardless of their instrument choices, providing vendor-neutral solutions to improve customer outcomes.

 

Some of the key products and applications include:

  • Liquid Chromatography

  • Gas Chromatography

  • Mass Spectrometry

  • Spectroscopy

  • Software and Informatics

  • Laboratory Automation and Robotics

  • Vacuum Technology

  • Cell Analysis

  • Chemistries and Supplies

 

In fiscal 2022, Agilent's life sciences and applied markets business served around 53,800 customers, many of whom were also customers of Agilent CrossLab business. This business segment experiences seasonal fluctuations in orders and revenues, influenced by factors such as government budgets, chemicals and advanced materials, environmental customers, and large pharmaceutical company budgets. Typically, the first and fourth fiscal quarters yield the highest profits for this segment, although economic trends, new product launches, and competition can impact this pattern in any given year.

 

Diagnostics and Genomics Business

The diagnostics and genomics business has six areas of activity that provide various solutions to customers in the clinical and life sciences research fields. The genomics business offers arrays for detecting DNA mutations, genotyping, determining gene copy numbers, identifying gene rearrangements, profiling DNA methylation and gene expression, as well as software for genetic data management and interpretation. They also provide solutions for clinical labs to identify DNA variants associated with genetic diseases and guide cancer therapy. The nucleic acid solutions business manufactures synthesized oligonucleotides for use in drugs that utilize nucleic acid molecules for disease therapy. The pathology solutions business focuses on cancer diagnostics and offers products for anatomic pathology workflows such as staining techniques. The biomolecular analysis business offers complete workflow solutions, including instruments, consumables, and software, for quality control analysis of nucleic acid samples in genomics research and clinical applications.

 

Agilent Technologies also collaborates with pharmaceutical companies to develop companion diagnostics for targeted therapies. The reagent partnership business provides clinical flow cytometry reagents for cancer diagnostics and supplies raw materials and assay development services to diagnostics, biotechnology, and pharmaceutical companies.

 

The company’s products fall into eight main areas of work: pathology products, specific proteins and flow cytometry reagents, companion diagnostics, target enrichment, cytogenetic research solutions and microarrays, PCR and qPCR instrumentation and molecular biology reagents, nucleic acid solutions and automated electrophoresis and microfluidics.

 

Agilent CrossLab Business

Agilent CrossLab provides a comprehensive range of vendor-neutral services, meaning they can support customers regardless of their instrument choices. The services include startup support, operational assistance, training, compliance support, software as a service, asset management, and consultative services to enhance customer productivity.

 

The company also offers tailored service bundles to meet the specific needs of different industries and ensure instruments remain operational and compliant. They provide support for measurement and data handling systems, including maintenance, troubleshooting, repair, and training for their hardware and software products. Many services can be offered remotely with advancements in digital and virtual support technologies. Additionally, Agilent's enterprise services encompass integrated laboratory management, instrument services, lab supply management, asset management, procurement, informatics, and scientific services, catering to the growing outsourcing and supplier consolidation trend.

Agilent Technologies Inc Reportable segments include the life sciences and applied markets business, the diagnostics and genomics business and the Agilent CrossLab business.

Agilent Technologies Inc Reportable Segment Revenue FY2022

Agilent Technologies Inc revenue from these geographic areas of Americas, Asia Pacific, and Europe.

Agilent Technologies Inc Revenue Geographic Breakdown FY2022

Agilent Technologies Inc Economic Moat

Agilent Technologies Inc Economic Moat
Agilent Technologies Inc has a wide economic moat. This is based on its intangible asset, cost advantage, efficient scale, network effect and switching cost.

Agilent Technologies Inc Economic Moat

 

Economic Moat: Wide

There are many ways to identify Agilent Technologies Inc’s economic moat, but I focus on the above 5 types. The rating is purely subjective and based on my in-depth understanding and analysis of Agilent Technologies Inc. Please check my summary to understand more about the economic moat.

Performance Checklist

Agilent Technologies Inc Performance Checklist

Is Agilent Technologies Inc’s revenue growing YoY for the past 5 years consistently? Yes.

Is the net income growing YoY for the past 5 years consistently? Yes.

Is the cash flow from operating activities growing YoY for the past 5 years consistently? Inconsistent.

Is the free cash flow positive for the past 5 years? Yes.

Is the gross margin % consistent/ growing for the past 5 years? Yes.

Is the EPS growing for the past 5 years? Yes.

Agilent Technologies Inc financial performance which includes its revenue, net income, operating cash flow, and FCF over the recent 5 years.

Agilent Technologies Inc Revenue, Net Income, Operating Cash Flow, and FCF (USD Million)

Is the free cash flow per share growing for the past 5 years? Yes.

Agilent Technologies Inc free cash flow per share is growing for the past 5 years.

Agilent Technologies Inc FCF per Share

Management Effectiveness

Is Agilent Technologies Inc’s ROE consistently at 12%-15% YoY for the past 5 years? Inconsistent.

Agilent Technologies Inc Management Effectiveness
Agilent Technologies Inc ROE is above its industry average ROE.

Agilent Technologies Inc Return on Equity

 

Is the ROIC consistently at 12%-15% YoY for the past 5 years? Inconsistent.

Agilent Technologies Inc ROIC is more than its WACC.

Agilent Technologies Inc Return on Invested Capital vs Weighted Average Cost of Capital

The trendline for the number of shares outstanding is decreasing, which is something that an investor would be pleased to see.

The number of Agilent Technologies Inc shares outstanding is increasing over the past 5 years.

Agilent Technologies Inc Shares Outstanding (Million Shares)

Agilent Technologies Inc Financial Health

Agilent Technologies Inc Financial Health
Agilent Technologies Inc balance sheet which includes total equity, total debt, and cash & short-term investments.

Agilent Technologies Inc Financial Health (USD Million)

 

Current Ratio: 2.37 (pass my requirement of >1.0)

Debt-to-EBITDA: 1.35 (pass my requirement of <3.0)

Interest Coverage: 18.58 (pass my requirement of >3.0)

Debt Servicing Ratio: 6.04% (pass my requirement of <30.0%)

Dividend

Current Dividend yield: 0.8%

Have the dividend payments been stable for the past 5 years? Yes.

Have the dividend payments been growing for the past 5 years? Yes.

Agilent Technologies Inc’s dividend payments are reasonably covered by its earnings and its cash flows.

Agilent Technologies Inc Dividend

Agilent Technologies Inc Stock Performance

The graph below shows the cumulative total stockholder return on Agilent Technologies Inc common stock with the cumulative total return of the S&P 500 Index and its peer group, consisting of all companies in the Health Care and Materials Indexes of the S&P 500, assuming an initial investment of $100 on 31 October 2017 and the reinvestment of all dividends.

Agilent Technologies Inc Stock Performance
Agilent Technologies Inc stock performance against its respective benchmarks.

Agilent Technologies Inc Stock Performance

Agilent Technologies Inc Intrinsic Valuation

Estimated intrinsic value: $73.23

Value is calculated using discounted cash flow method (taking into account their cash and debt) and scenario planning.

Average free cash flow used: USD$1,060M

Projected growth rate: 9% - 10%

Beta: 1.09

Discount rate: 7.5%

Margin of safety: 30% (Uncertainty: Mid)

Price range after the margin of safety: <$ 52.00

Date of calculation: 27 June 2023

Agilent Technologies Inc Intrinsic Valuation
Agilent Technologies Inc valuation based on discounted cash flow method. A fundamental analysis by The Globetrotting Investor.

Free cash flow used is a weighted average that is rounded to the nearest tens. In some instances, I used a more realistic number to represent the free cash flow.

Total debt and cash and short-term investments are last quarter figures that are rounded to the nearest tens. In some instances, I used more realistic numbers to represent them.

Agilent Technologies Inc fair value and its 52 weeks range.

Agilent Technologies Inc Intrinsic Valuation

Agilent Technologies Inc Relative Valuation

Agilent Technologies Inc Relative Valuation
Comparison of Agilent Technologies Inc EV-to-EBITDA against its five closest industry peers.

Agilent Technologies Inc EV-to-EBITDA vs its peers

Comparison of Agilent Technologies Inc price-earnings ratio against its five closest industry peers.

Agilent Technologies Inc Price-Earnings Ratio vs its peers

Agilent Technologies Inc price-earnings ratio for the past 5 years and its 5-year average.

Agilent Technologies Inc Historical Price-Earnings Ratio

Additional Resources

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My Top Concern

Agilent Technologies' business is vulnerable to changes in the overall economy, both domestically and internationally. Factors like slower global economic growth, inflation, market instability, and uncertainty can have negative impacts on its operations. These effects include reduced product demand, delays in shipments, cancellations of orders, increased inventory risks, pricing pressure, and potential devaluation of its investment portfolio. The company's understanding of these markets is limited, and its quarterly sales and forecasts depend on uncertain order volumes and timing. Changes in customer spending policies and budget allocations can also disrupt expected seasonal patterns.

 

The demand for Agilent Technologies products and services is influenced by numerous factors such as public policy, available resources, budgetary policies, and economic cycles. Customers, including pharmaceutical companies, laboratories, universities, healthcare providers, government agencies, and research institutions, make decisions regarding capital spending based on these factors. Fluctuations in research and development budgets, driven by changes in resources, consolidation, priorities, and economic conditions, can significantly impact Agilent Technologies' business. Furthermore, revenue from customers dependent on government funding or research is subject to unpredictability due to changes in spending authorizations and budget priorities.

 

Both customers and Agilent Technologies are subject to various governmental regulations. Compliance with, or changes in, such regulations may result in significant expenses for the company. If Agilent Technologies fails to maintain satisfactory compliance with certain regulations, it may be required to recall products, halt their production and distribution, and face civil or criminal penalties.

 

Competition, rapid technological changes, and evolving industry standards are characteristic of the industries in which the company operates. Introducing new products and services promptly is crucial to avoid becoming obsolete technologically and to maintain revenue and operating results. Success relies on factors such as identifying customer needs, innovation, effective allocation of resources to research and development, timely commercialization, manufacturing and delivery capabilities, differentiation from competitors, competitive pricing, the anticipation of competitor advancements, and maintaining product quality. Failing to accurately predict customer needs or develop viable technologies can lead to unprofitable investments. Even successful innovation incurs costs, and market success may be limited by customer concerns. Collaborating with pharmaceutical customers carries risks if drug programs are cancelled due to failures in clinical trials.

My Top Concern

Summary for Agilent Technologies Inc

Summary for Agilent Technologies Inc

Agilent Technologies Inc. is a company that provides products and services widely used in various sectors, including healthcare, chemicals, food, and the environment. While Agilent primarily focuses on healthcare applications, such as clinical diagnostics, it also generates a sizeable portion of its sales from non-healthcare sectors.

 

Life science toolmakers in the field of drug production have attractive businesses due to two key factors. Firstly, the strict regulations surrounding drug manufacturing create enduring switching costs for end users, ensuring a steady revenue stream for life science toolmakers. Secondly, these toolmakers benefit from extensive exposure to the growing biopharmaceutical industry while mitigating risks associated with specific products.

 

With these characteristics, Agilent possesses valuable intangible assets and high switching costs, giving it a competitive advantage. Let us explore how these two sources of economic advantage impact its business.

 

Agilent enjoys a substantial economic moat in its analytical instrument business, fuelled by intellectual property and continuous innovation. Switching costs are also created due to factors like regulations and the reproducibility of results. Their strategic approach involves providing analytical instruments, informatics solutions, and related services and consumables to customers, contributing to their sales. Approximately half of Agilent's sales are recurring, and they benefit from long-standing customer loyalty, especially in the regulated pharmaceutical sector and other specialized applications that require extensive training.

 

The distinctive properties of Agilent's tools impact the performance, accuracy, and speed of various research projects, leading to the creation of differentiated product features. These products play a vital role in influencing decisions to use Agilent's tools in specific applications, particularly at the beginning of a project. To remain relevant to scientists in the early phases of projects, Agilent must continue its commitment to innovation, which contributes to the accumulation of intangible assets in this business. Agilent is strongly motivated to innovate as the introduction of new products not only brings positive mixed benefits but also gives the company some pricing power in comparison with related products. Furthermore, its unique technology is protected by a range of intellectual property, including patents, copyrights, and trademarks, which function as barriers preventing competitors from directly replicating its technology.

 

Agilent benefits from significant switching costs across most of its end markets, particularly in the biopharmaceutical sector. In this specific market, Agilent's analytical tools are crucial for the production methods of various drugs, as specified in each drug's regulatory approval application. Throughout a drug's lifecycle, regulators require adherence to the same manufacturing process, including quality assurance and quality control tests conducted using Agilent's tools. Any changes to the manufacturing process require regulatory approval. These strict regulatory requirements, combined with concerns about reproducibility, including employee training and learning curves, create switching costs for biopharmaceutical customers. As a result, Agilent enjoys a long-term advantage in this tightly regulated market. Additionally, once the key patents for a drug expire, generic manufacturers often seek to adopt the same production methods used by the original brand manufacturer to minimize product variability. This adoption by generic manufacturers can further extend Agilent's advantage for a specific molecule.

 

Agilent's diagnostics business demonstrates advantages derived from intangible assets associated with its unique testing platforms, serving as the primary source of competitive advantage, accompanied by some switching costs. Within this division, Agilent's tools play a significant role in diagnosing patients and formulating therapeutic plans, primarily focusing on oncology indications. The company's installed base of instruments in this business, along with consumable sales, contributes to its strength in this specialized segment, where pathologists conduct intricate and time-consuming tests compared to the broader diagnostics market. Additionally, Agilent operates in the companion diagnostic tool market, producing consumable tests that help physicians tailor therapeutic options for individual patients. Furthermore, Agilent provides sample preparation tools for the significant next-generation sequencing market.

 

In conclusion, Agilent Technologies Inc. possesses significant competitive advantages in the form of intangible assets and high switching costs, making it a wide-moat company. With its strong presence in the healthcare industry and its ability to generate sales from diverse sectors, Agilent benefits from enduring customer loyalty and enjoys a prolonged benefit period in tightly regulated markets. The company's focus on innovation and its unique technology protected by intellectual property further solidifies its position. Agilent's analytical instruments, informatics solutions, and diagnostics business demonstrate its strength and expertise in providing essential tools for research, drug production, and patient diagnostics. Overall, Agilent Technologies Inc. stands as a robust and resilient player in its field.

Agilent Technologies Inc.'s revenue has steadily increased year over year, highlighting its ability to generate consistent sales and attract customers. Similarly, its net income has experienced consistent growth, indicating the effectiveness of Agilent's business strategies and operational efficiency. While Agilent has managed to maintain positive free cash flow throughout the past five years, the year-on-year growth in operating cash flow has fluctuated. Nevertheless, the company's overall financial health remains robust. Agilent has a consistent gross margin percentage, showcasing its ability to manage costs and optimize profitability. Furthermore, the free cash flow per share has exhibited consistent growth, indicating Agilent's commitment to creating value for its shareholders.

 

Agilent Technologies Inc. has exhibited some inconsistency in its ROE and ROIC over the past five years. While the ROE has not consistently remained within the 12%-15% range year over year, it has surpassed the industry average ROE, indicating that Agilent is performing relatively well compared to its peers. Similarly, the ROIC has also shown some variation and has not consistently maintained the 12%-15% range. However, it is noteworthy that Agilent's ROIC has consistently exceeded its WACC, suggesting that the company's capital allocation decisions have been effective in generating a positive return on invested capital. Furthermore, Agilent has demonstrated a declining trend in the number of shares outstanding, which is a positive indicator for investors.

 

Agilent Technologies Inc. showcases strong financial health based on several key indicators. The company's current ratio of 2.37 surpasses my minimum requirement of 1.0, indicating that Agilent possesses sufficient current assets to cover its short-term liabilities. Moreover, with a debt-to-EBITDA ratio of 1.35, Agilent demonstrates a healthy level of leverage. Agilent's interest coverage ratio of 18.58 further reinforces its financial strength by surpassing my benchmark of 3.0, highlighting its capacity to meet interest payments from its operating profits. Additionally, the debt servicing ratio of 6.04% signifies that Agilent's debt repayments account for only a small percentage of its income, comfortably below the threshold of 30.0%. These positive financial metrics collectively reflect Agilent Technologies' robust financial health, indicating its strong capacity to manage debt and fulfil its financial obligations.

 

Investing in Agilent Technologies comes with a mix of factors to consider. On the positive side, the company possesses a wide economic moat, suggesting a competitive advantage that can help sustain its market position over time. However, Agilent's performance and capital allocation have not been consistently strong, introducing some uncertainty into the investment outlook. Nevertheless, the company maintains a healthy balance sheet, which provides a solid foundation for its operations. Given the mixed signals, investing in Agilent Technologies would entail a significant amount of uncertainty. To mitigate risks, it is prudent to seek a margin of safety of at least 30%, allowing for potential unforeseen challenges and providing a buffer against potential downturns in the market. By incorporating a margin of safety, investors can approach their investment in Agilent with a cautious and risk-aware mindset.

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