Goldman Adds Agilent To Conviction List: 'EPS Drivers Are Underappreciated'

Goldman Sachs has added Agilent Technologies Inc A to its "Conviction List," saying that the company's "EPS drivers are underappreciated."

"[W]e think consensus underappreciates the potential for upside in Agilent's top-line and operating margin performance, both of which we think will outpace the peer group average over the next few years," analyst Isaac Ro wrote in a note.

The analyst, who raised the price target on the stock to $49 from $47 (implying 17 percent upside), said lateral data points during the first quarter earnings season and recent FX trends have increased his confidence on EPS upside.

Ro said investors are underestimating the fact that the split from Keysight re-aligned Agilent's businesses toward higher growth markets, which offer "better opportunities for innovation, less cyclicality and better long-term pricing power."

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"We believe this will translate into more consistent organic growth and EPS performance vs. history. Should management execute well against this backdrop, we expect investors will ascribe higher fundamental valuation multiples over the coming quarters," Ro elaborated.

Ro sees two near-term catalysts for the stock in the form of second quarter earnings on May 16 and the company's annual investor meeting on May 25.

Ratings, Justification

The analyst, who has a Buy rating on the stock, anticipates better-than-expected second-quarter results and guidance. Ro projects second-quarter revenue at 1 percent above consensus and in-line EPS. For FY16, the analyst sees revenue/EPS that is 2/3 percent above consensus.

Wall Street analysts, on average, expect the company to report earnings of $0.39 a share on revenue of $983.08 million for the second quarter. For the full year, the Street sees earnings of $1.86 a share on revenue of $4.13 billion.

Investor Meeting And Full-Year Expectations

Commenting on the upcoming investor meeting, the analyst said, "We are bullish on the potential for positive revisions to consensus EPS in the out-years, as the company is likely to provide updates on key assumptions and progress behind long-term margin expansion initiatives. We also look for an update on capital allocation plans which could drive incremental upside to our outlook."

For the full year, Ro noted that the consensus estimates "look beatable" given the company's strong end markets and modest headwinds in the cyclical end markets. The analyst sees organic growth about 100bps ahead of FY16 guidance.

"We think Agilent's end markets are poised to accelerate given strength in Academic funding, Biopharma and diagnostics paired with mitigating headwinds from chemical and energy," Ro noted.

However, the analyst acknowledged that several tools companies such as Mettler-Toledo International Inc. MTD, Bruker Corporation BRKR and Illumina, Inc. ILMN have reported softer first-quarter results in Europe due to greater-than-expected impacts from softer government spending and the Easter holiday.

"We believe it is too early in the year to point to a strong trend but acknowledge this could offset some of the upside to Agilent's FY16 organic growth performance," Ro added.

According to TipRanks, Ro has a success rate of 58 percent with an average return per recommendation of -1.9 percent. The analyst is ranked 2,846 out of 3,926 analysts.

Shares of Agilent closed Tuesday's regular trading up 1.62 percent at $42.