ModernGraham Valuation: Agilent Technologies Inc. (A)

moneyCompany Profile (obtained from Google Finance): Agilent Technologies, Inc. (Agilent) is a measurement company providing bio-analytical and electronic measurement solutions to the communications, electronics, life sciences and chemical analysis industries. During the fiscal year ended October 31, 2011 (fiscal 2011), it had three business segments: electronic measurement business, chemical analysis business and life sciences business. Its electronic measurement business addresses the communications, electronics and other industries. Agilent’s chemical analysis business focuses on the petrochemical, environmental, forensics and food safety industries. Its life sciences business focuses on the pharmaceutical, biotechnology, academic and Government, bio-agriculture and food safety industries. In addition to its three businesses, it conducts research through Agilent Technologies Laboratories (Agilent Labs). In June 2012, the Company acquired cancer diagnostics company, Dako. In August 2012, the Company acquired Aurora SFC Systems, Inc.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – FAIL
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $87.70
MG Opinion Undervalued
Value Based on 3% Growth $34.72
Value Based on 0% Growth $20.35
Market Implied Growth Rate 7.72%
Net Current Asset Value (NCAV) -$1.25
PEmg 23.94
Current Ratio 3.11
PB Ratio 3.61

Balance Sheet – 9/30/2013 

Current Assets $4,983,000,000
Current Liabilities $1,602,000,000
Total Debt $2,699,000,000
Total Assets $10,686,000,000
Intangible Assets $4,133,000,000
Total Liabilities $5,400,000,000
Outstanding Shares 333,000,000

Earnings Per Share

2013 $2.10
2012 $3.27
2011 $2.85
2010 $1.94
2009 -$0.09
2008 $1.87
2007 $1.57
2006 $3.26
2005 $0.28
2004 $0.71

Earnings Per Share – ModernGraham 

2013 $2.39
2012 $2.35
2011 $1.80
2010 $1.42
2009 $1.24
2008 $1.78

Conclusion:

Agilent Technologies Inc. is a company that seems to have turned the corner from a poor year during the recession to have some positive potential for the future.  The company is not suitable for the Defensive Investor because of its lack of a long dividend history, lack of stable earnings, and high PEmg and PB ratios.  However, it is suitable for the Enterprising Investor after only failing the requirement that it have a positive earnings for at least 5 years.  Enterprising Investors should feel comfortable continuing with further research, including a review of the ModernGraham valuation of General Electric.  From a valuation side of things, the company’s EPSmg (normalized earnings) grew from $1.24 in 2009 to $2.39 for 2013.  This level of growth outpaces the market’s implied estimate of 7.72%, and as a result the company appears to be undervalued at the current time.

What do you think?  Do you agree that Agilent Technologies Inc. is undervalued?  What would be your assessment?  Is the company suitable only for Enterprising Investors?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

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Disclaimer:  The author did not hold a position in Agilent Technologies (A) at the time of publication and had no intention of changing that position within the next 72 hours.

Photo Credit:  Andrew Magill

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