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Sydnee Gatewood
Sydnee Gatewood
Articles (2814) 

Bill Ackman Comments on Agilent

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August 28, 2020 | About:

Agilent (NYSE:A)

Agilent's fiscal third quarter results were demonstrative of the company's high-quality, resilient business model and significant margin expansion opportunity. In what the company expects to be its most challenging quarter of the year, organic revenue declined only 3%, supported by stable performance in its CrossLab service and consumables segment, which grew 1%. While the pace of recovery throughout the quarter varied by region depending on when each region faced the brunt of the pandemic, the company exited July with positive growth across all of its regions. Notably, even with a modest revenue decline, the company was able to expand operating margins by 90 basis points year-over-year by effectively managing its cost structure. Agilent's stock has increased 16% year-to-date.

Since the onset of the pandemic, Agilent has outperformed its comparable peer group with meaningfully lower revenue declines than peers. Despite the ongoing disruption from the pandemic, the company remains highly focused on product innovation and sales efforts to drive market share gains. For example, in its service business, Agilent introduced new workflow solutions to capitalize on the trend of labs outsourcing multiple services to a single vendor. The company has recently won several large, lab-wide, enterprise service contracts. Likewise, in its instrument portfolio, Agilent launched two new mass spectrometry product lines aimed at increasing testing throughput and reducing downtime. We expect these initiatives to drive long-term sales growth as they expand the installed base of Agilent instruments, and increase the penetration of its service and consumables offerings.

We are encouraged by Agilent's ability to expand operating margins over the last two quarters by 50 and 90 basis points year-over-year, respectively, despite facing modest revenue declines from the pandemic. This improvement in operating profitability in a highly challenging environment highlights the magnitude of the company's future margin expansion potential. We believe the pandemic has provided the company with a timely opportunity to closely review its discretionary overhead expenses and accelerate investments in digital tools and capabilities. Agilent was able to deliver cost savings without furloughing a single employee. The resulting organizational stability has allowed the Agilent team to remain focused on engaging with customers and driving new business.

With increasing visibility on improving business conditions, the company resumed its share buyback program which it had temporarily suspended in March. We continue to believe Agilent's current valuation does not give sufficient recognition to the company's high-quality business model, strong revenue growth outlook, and significant margin expansion potential.

From Bill Ackman (Trades, Portfolio)'s Pershing Square 2020 semiannual shareholder letter.

About the author:

Sydnee Gatewood
I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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