Shares of Agilent Technologies (A, Financial) fell massively last week following the announcement of (calendar year) Q2 results. This came following a weak guidance issued by the company for the next quarter and fiscal 2015 particularly on the revenue side.
However, the stock appears to have started recovering over the last few days, which suggests that it may have already started shaking off the initial negative impact following the weak guidance. In addition, judging by the guidance issued and the current pricing, it is pretty clear that Agilent technologies received too much of a beating than it deserved.
Illustratively, shares of Agilent Technologies fell from $39 per share to about $34 per share but are now trading at about $36 per share. This represents about 7.7% net decline from the price the stock was trading at just before earnings release.
From a technical perspective, shares of Agilent Technologies are currently trading well below the 50- and 200-day SMA, while the RSI indicates that market sentiment is just entering normal zone, after dropping to oversold levels a few days ago.
As such, based on technical evaluations, many investors will be looking to buy the stock at this moment even given the recent resurgent in price. It is also important to note that shares of Agilent Technologies have not traded lower than the current level since November 2013 (excluding the levels touched few days).
Fundamental analysis
In the most recent quarter, Agilent Technologies reported a decent performance beating analyst estimates on both revenue and earnings. Analysts expected the company to report $1 billion in revenue and $0.41 in EPS, but the company slightly topped those estimates after posting $1.01 billion in revenue and $0.44 in non-GAAP EPS.
The weak link in the earnings release was, however, in the guidance for next quarter and fiscal 2015 especially in revenue terms after the company lowered the initial guidance of $4.05-$4.11 billion for fiscal 2015 to $4.03-$4.05 billion. The company also reduced the higher side of guided EPS to $1.72 for the year from $1.73, but increased the lower side by a cent to $1.68.
Guidance on fiscal Q4 2015 (or Q3 in calendar year terms) came short of analyst estimates in both revenue and earnings with the company now expecting to post revenue of $1.03-$1.05 billion for the quarter and EPS of $0.45-$0.49 compared to consensus estimate of $1.065 billion and $0.49 respectively.
Now, by looking at those numbers, it is clear that the current decline in the price of the shares of Agilent Technologies cannot be justified.
The company also seems to have decent profitability margins compared to industry averages, with a gross margin of 52% versus 45%. The operating margin of 13% is also better than the industry average of -15%, but trails that of rivals Thermo Fisher Scientific (TMO, Financial), Danaher Corp (DHR, Financial), and Teradyne (TER, Financial), which have 14%, 18% and 14% respectively.
However, the company’s price to sales ratio looks very impressive at just 1.63x, while its peers are priced at least 2x the value of sales per share. The industry average of 3.76x also suggests that Agilent Technologies is trading cheaply in P/S terms.
Additionally, Agilent Technologies currently trades at EV/EBITDA of about 9.52x, which again tramps close rivals’ Thermo Fisher 15.69x, and Danaher 12.83x. The company also has massive amounts of cash on its balance sheet at $2.08 billion compared to a total debt of $1.66 billion, and runs on an impressive current ratio of 4.08, which means it is in good health as far as paying those short term obligations are concerned.
Risks
One of the biggest risks that Agilent Technologies, like other multinational companies, is facing is the impact of a strong dollar on income reported. This is likely to continue in the near future as speculation over interest rate increase in the US continues.
There are some who believe that interest rate hike might happen before December, which could strengthen the dollar, thereby hurting Agilent Technologies’ revenue from overseas. As a matter of fact, the company would have reported 9% increase on revenue year over year for the most recent quarter had it not been for 7% foreign exchange headwind.
Additionally, the company is currently undergoing restructuring and is also making some acquisitions, which are resulting into additional costs. Illustratively, this resulted into GAAP EPS of $0.31, in which case this represented a decline of $0.12 from the EPS of $0.43 reported in the same quarter a year ago.
In the most recent quarter Agilent Technologies reported $953 million worth of orders, which represents 8.3% decline in orders sequentially and 6.3% decline year over year. This is probably why the company lowered guidance for next quarter and thus things may not look good for Agilent in the near term unless it reverses that trend before the end of the year.
Conclusion
The bottom line is that the recent decline in the price of Agilent Technologies shares was too much compared to the mathematical implication of the weak guidance issued during the last earnings call. The company looks financially stable with some good cash in the books and has also paid $33 million in dividends to shareholders to add to the $99 million share buyback.
Investors can look to this to confirm that the company is really looking to boost the return on investment and this should help calm the rapid selling witnessed in the past week or so. This could subsequently trigger another rally that could carry the stock to around $40 per share within the next three months. In addition, analysts currently believe that the stock of Agilent Technologies is worth about $46 per share, which then sets a good target for buyers.
