Agilent Technologies (A)

By: Steve Rubis

Ticker: A
Market Cap: 14.10B
Target Value: $44
P/E: 5.03 Forward P/E: 18.55
Revenue: 5.63B
P/S: 2.44
EBITDA: 1.77B
EPS: $6.86
Cash: 2.25B
Debt: 1.50B



Leader in Measuring Equipment Embarks On Spin Off

Unfortunately, it has been some time since we last profiled a stock for investment. Today we wish to analyze Agilent Technologies (A). The stock is rated a strong buy with a target price of $44. We believe that accelerating earnings coupled with the company’s spin off of Verigy (VRGY) will generate considerable share price appreciation. Currently, our outlook for the Scientific and Technical Equipment industry is positive, since we are interested in three firms in this industry: Agilent (A), Hurco Companies (HURC), and Winland Electronics (WEX).

Agilent Technologies is a diversified technology business with a core focus of measurement equipment. The company implemented a major restructuring program in 2005 in order to focus on the measurement business. Their new corporate strategy is to be the number one provider of scientific measurement equipment.

In order to attain this strategy, Agilent felt it should divest itself of all non-core assets. In 2005, the corporation sold its semiconductor test business to Avago for $2.5B. The completion of this divestiture will occur on October 31, 2006. At that time, all remaining shares in the subsidiary Verigy will be given to Agilent shareholders as a special dividend. Each shareholder on record as of October 16, 2006, will receive 0.12 Verigy shares per each Agilent share owned.

It seems that the spin off of Verigy is a potent catalyst for unlocking the true value of Agilent. A non-core asset will be spun off, which will allow the corporation to more closely focus on the core business. A simple breakout of revenues illustrates the value of this move; the electronic measurement business contributes $3.3B, bio-analytical measurement contributes $1.4B, and semiconductors only$0.5B to total revenues.

The company embarked upon a major restructuring plan in 2005. The crux of the restructuring concerned the two spin offs mentioned above. Other initiatives that occurred were: (1) retirement of its convertible debt; and, (2) a $4.466B share repurchase program. At the end of 2005, Agilent had repurchased 92M shares at a price of $3.3B.

Here are some highlights of their third quarter earnings announcement:

1.) Revenues increased by 17%
2.) EPS was $0.55 vs. $0.10 for the quarter
3.) $86M in charges due to the Verigy spin off
4.) Asia and Europe provided the most growth
5.) Orders increased 15% for the year-over-year period

Lastly, the company has a strong balance sheet, giving investors confidence in the business as a going concern. Its Atlman Z score, an equation used to predict bankruptcy with 99% accuracy, is 4.32, well above the threshold score of 3 for financially sound companies. Secondly, it has a net current asset value of $0.69 and current asset value of $5.43. While these values are lackluster, the fact that they are meaningful and not negative further gives us some confidence.
In closing, we believe that Agilent offers investors a compelling value play. The potent catalyst of a spin-off is near completion. We think that once the spin off is completed that share price could appreciate to near the $44 level.

Please review the following documents used to develop our research:
Verigy Spin Off Ratio
Barron’s Price Appreciation Article
Scientific and Technical Instruments Spreadsheet

This item is our relative analysis of the Scientific and Technical Instruments Industry. Please review our calculations and take issue with them if you like!!!