Agilent on Road to Recovery - Analyst Blog

Following stellar results in the fiscal first quarter ended January 2010, Agilent Technologies’ (A) CFO, Adrian Dillon, has left the company. However, despite Dillon’s long stint at Agilent, share prices did not reflect concern due to his departure. This is mainly because the company’s end markets are seeing strong recovery that Agilent is well positioned to take advantage of.

Stronger Markets

Revenue was ahead of the Zacks Consensus in the last quarter, with North America stabilizing, Europe benefiting from currency gains and Asia continuing to grow strongly.

The company also changed its reporting structure to better reflect the growing prospects in the previously reported Bio-Analytical segment. This segment has now been split into Life Sciences and Chemical Analysis. The rest of the revenue was reported under the Electronic Measurement segment.

Food, petrochemicals, forensics and environment verticals are driving the company’s strength in the Chemical Analysis business. All of these markets show secular growth trends, both in developed and developing countries.

Agilent is seeing very strong orders from all over Asia and particularly China. The company’s strong position in China could help it gain market share. Additionally, new products in the Life Sciences segment are driving strength at pharmaceutical, academic and government customers. These segments have held up relatively well even during the recession.

The Electronic Measurement segment suffered on account of the recession, although we now expect growth to return on the back of double-digit order increases from the semiconductor, computing and industrial markets. The company is the leading provider of network analyzers and spectrum analyzers into these markets and also has a comprehensive portfolio of oscilloscopes.

We believe the momentum in these markets will continue through the rest of fiscal 2010. Although communications testing revenue (specifically handset testing) declined double-digits in the last quarter and is expected to decline again in the current quarter, we believe this is near-term softness. Gartner expects handsets to grow 11-13% this year, which means testing demand will accelerate as we move through the year.

Healthier Profits

Margins in the last quarter benefited from higher volumes, increased efficiencies and cost reductions from restructuring actions.

Over the last few years, the company has reorganized the business a couple of times with the primary objective of streamlining operations and focusing management attention on core competencies. Management expects the latest $325 million restructuring of the Electronic Measurement segment to be more or less completed in the first half of fiscal 2010. This is expected to raise segment operating margins from the current 9% level to the 12% level at an annual revenue runrate of $2.4 billion.

Since the Electronic Measurement segment generates over 50% of revenue and the rest of the business generates significantly higher margins, the leaner cost structure will help the company report strong profits profits significantly.

Guidance is Strong

Although management adopted a conservative tone, a tentative guidance of 10% revenue growth for fiscal year 2010 was provided. Management also stated that full-year earnings could be expected to come in at around $1.65-$1.70.

Estimate Trends & Revisions

As a result of the performance in the last quarter, Agilent’s first quarter earnings beat the Zacks Consensus Estimate by 6 cents, or 18.75%. The positive surprise was less than in the two preceding quarters, when results exceeded guidance by more than 30%. On average, results have beaten the Zacks Consensus by 20.69% in the last four quarters.

We believe the accuracy of estimates for 2010 will continue to improve, as there is now greater certainty of a rebound. This is the reason for the relatively smaller surprise in the last quarter. Moreover, analysts have been quick to revise estimates after the company reported earnings, so that upside potential at this point looks limited.

The Zacks Consensus Estimate for the current quarter is 41 cents, up 7 cents since the company reported earnings. Fiscal third quarter and full-year estimates have also been raised. Accordingly, the Zacks Consensus Estimate for fiscal 2010 is currently $1.68 (the middle of the guided range). This is an increase of 22 cents since the company reported earnings and a clear indication that estimates have been revised to give effect to the stronger outlook.

In a Nutshell

We believe the much stronger outlook and the improvement in Agilent’s all-round performance is already reflected in analyst expectations and consequently, share prices. Further upside will therefore be limited, in our opinion. This is the rationale behind the Zacks #3 Rank (short-term Hold) and long-term Neutral recommendation on Agilent shares.

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