Boost in research spending will pay off

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Cannabis-Connected

This company is set to add to its steadily increasing profits with special equipment to help cannabis producers maximize their yields.

The industry is struggling to boost its output to meet high demand, so this firm’s focus on improving its equipment—it raised its R&D spending 13.6% in 2018—should continue to pay off.


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AGILENT TECHNOLOGIES INC., $71.32, (New York symbol A; Shares outstanding: 318.5 million; Market cap: $22.7 billion, www.agilent.com) makes specialized testing equipment, like mass spectrometers, for medical research laboratories and industrial clients.

In 2000, the old Hewlett-Packard set up Agilent as the owner of its testing equipment business, and then spun Agilent off—that is, handed it out to its own shareholders as a special dividend. Since then, Agilent has completed two spinoffs of its own: Verigy (in 2006), a maker of computer chip testing gear; and Keysight (in 2014), focused on products for testing electronic equipment.

Agilent’s revenue rose 2.9%, from $6.8 billion in 2013 to $7.0 billion in 2014 (fiscal year ends October 31). Earnings rose 3.4%, from $995 million to $1.03 billion; because it had fewer shares outstanding, its earnings per share rose 5.6%, from $2.88 to $3.04.

In November 2014, Agilent spun off its Keysight subsidiary and gave its shareholders one Keysight share for every two Agilent shares they held.

Due to acquisitions, Agilent’s revenue rose 21.7%, from $4.0 billion in 2015 to $4.9 billion in 2018.

Earnings before unusual items jumped 54.8%, from $586 million in 2015 to $907 million in 2018. Per-share earnings rose 60.3%, from $1.74 to $2.36.

In addition to acquisitions of related businesses, Agilent continues to invest heavily in developing its own products. Its research costs in fiscal 2018 rose 13.6%, to $385 million (or 7.8% of revenue) from $339 million (or 7.6%) in 2017.

Among its new products are mass spectrometers that detect and verify the active ingredients in cannabis. Those machines can also measure the composition of soil and fertilizers used to grow cannabis. That will help producers improve the quality of their products, and maximize crop yields.

The outlook for this equipment is bright, as legalization will force growers to monitor the quality of their cannabis and keep out unhealthy contaminants. As well, Agilent’s products will help producers comply with varying standards in Canada and individual U.S. states for the permitted amount of THC (the psychoactive substance) in recreational cannabis.

Pharmaceutical makers and medical research labs are also stepping up their studies into the effectiveness of cannabis as a treatment for pain and various diseases.

Agilent also stands to gain from ongoing sales of replenishable supplies and software updates. Services now account for about 25% of its total revenue.

The company will probably earn $3.04 a share for fiscal 2019. The stock trades at 23.5 times the midpoint of that range. That’s a reasonable multiple in light of its high level of research spending.

Agilent also now plans to buy back up to $1.75 billion of its shares, or 8% of its market cap. There are no time limits for those purchases. As well, the company recently increased its quarterly dividend by 10.1%, to $0.164 a share from $0.149. The new annual rate of $0.656 dividend yields 0.9%.

Agilent Technologies is a buy.

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