Analyst Isaac Ro wrote, “We see multiple reasons to be constructive on 2016 fundamentals in Tools as biopharma R&D spend should accelerate, academic funding could inflect positively, and industrial spend should outpace GDP growth.”
He added that Agilent and FEI were among the top picks in the life science tools and diagnostics segment, which has 18 percent upside on average.
Agilent: Favorable Set Up Under New CEO
Ro upgraded the rating on the company raised from Neutral to Buy, while raising the price target from $39 to $48.
Agilent’s new CEO Mike McMullen has steered the company to deliver two consecutive EPS beats, indicating the progress toward an era of “more consistent and higher quality execution,” the analyst said.
Ro believes that the company’s FY16 organic growth guidance and long-term margin expansion goals are conservative. He added that Agilent’s stock valuation looks undemanding as the company’s shares trade in-line with peers, despite favorable growth prospects and margin expansion opportunities.
Agilent’s split from Keysight Technologies Inc KEYS in October 2014 helped the former company align its business toward higher growth and less cyclical end markets like biopharma and environmental safety. Ro added that investors are likely to soon appreciate the new Agilent and ascribe it a higher multiple.
The company’s attractive position in a consolidating industry and the strategic value of its assets will warrant a greater M&A premium, the Goldman Sachs report added.
FEI: Favorable Cyclical And Secular Trends
Ro upgraded the rating on the company from Neutral to Buy, while raising the price target from $72 to $94. He believes that an inflection in semi capex in 2016, ahead of the production ramp up of the next generation of semis based on 10mm architectures, should enable FEI to perform better and post meaningful growth.
Ro expects secular tailwinds to drive increased demand for FEI’s products. He added, “We believe semi manufacturers will become more reliant on FEIC’s technology to drive improved yields, helping the company gain incremental wallet share within its core semi customer base.”
FEI’s flexible balance sheet and potential capital deployment could drive upside. The company is also expected to benefit from a strengthening USD vs the euro. The current stock valuation does not reflect the company’s long-term opportunity to take share in the life sciences R&D segment, the Goldman Sachs report added.
Myriad Genetics: Franchise Is More Durable
The analyst upgraded the rating on Myriad Genetics from Sell to Neutral, while raising the price target from $31 to $40. He commented that the company’s new market share had stabilized in recent quarters and the entry of new competitors was raising awareness of hereditary cancer testing.
Management is focusing on expanding the product portfolio to boost growth, as the hereditary cancer segment faces headwinds in the form of potential share loss and pricing pressure. Ro expects that by FY18, new product lines will generate around 40 percent of Myriad Genetics’ total revenues and drive nearly all revenue growth.
Uncertainty around BRCA’s market share as well as pricing assumption and the unproven TAM and launch trajectory of new products are expected to limit multiple expansion in the near term, the Goldman Sachs report stated.
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