Agilent Technologies Inc. (NYSE:A) is a highly diversified company, although almost half (48%) of its sales are generated by the Electronic Measurements Group (EMG). The recent reduction in this segment’s sales led to a sell-off, providing an interesting entry point for long-term investors. I think that shares are expected to perform well based on three key reasons.
Good position to benefit from an economic recovery
Agilent Technologies Inc. (NYSE:A) largely relies on a good economy since 70% of the company´s total annual income comes from instrument sales. In an increasing GDP context, sales should expand as well (historically, the correlation between GDP growth and revenue has been strong), and this is case expected this year. GDP is expected to grow approximately 3.5% during 2013, providing a promising outlook for Agilent Technologies Inc. (NYSE:A) in the near future (12-18 months).
Another fact to be noticed is that the firm´s exposure in emerging economies is greater than competing companies, although it is closely followed by Waters Corporation (NYSE:WAT), obtaining 26% of its sales from these countries (including China´s 17%). While China´s expected GDP growth is a matter of controversy, emerging markets, on an average, experience a greater GDP growth than advanced ones. A GDP increase of over 3.5% in developing countries would provide an extra boost to Agilent´s profit.
However, Waters is also to be considered, as it trades at 5.35 times P/B, one of the lowest ratios in the past few years. In addition, the operating margin continues to expand, despite some meanders, and currently sits at 27.7%, outperforming 72 of the 76 companies in the U.S. Medical Devices industry.
Although the stock price is currently high and some other issues raise investors’ eyebrows, like the issuing of over $500 million in debt over the past three years and a very reduced growth in per share revenue, Waters should be watched closely as several analysts assure that the company’s long-term outlook is promising, since it is better prepared than most of its peers to face the consequences of academic and governmental budget cuts.
In addition, Waters is one of the top players in the spectrometry market, which is expected to enjoy a sustained growth in the coming years. It is important to remember that a significant part of Waters Corporation (NYSE:WAT)’ revenue comes from recurring sources, which provides some stability and strength to its business model.
Coming back to Agilent Technologies Inc. (NYSE:A), its business in industrial end markets is also the greatest, by far, in the sector. About 70% of its revenue comes from industrial end markets, while competitors like Thermo Fisher Scientific Inc. (NYSE:TMO), Waters Corporation (NYSE:WAT), Life Technologies Corp. (NASDAQ:LIFE), Qiagen NV (NASDAQ:QGEN), and Illumina, Inc. (NASDAQ:ILMN) usually can´t clock even 20%. If predictions of an economic recovery are correct, this condition should prove to be beneficial and the company should outperform its competitors.