Cannabis testing set to pay off for investors in Agilent Technologies

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Cannabis-Connected

The global market for cannabis testing equipment is projected to reach $2.2 billion U.S. by 2025. That’s set to spur earnings for this testing-equipment maker already offering marijuana-specific equipment


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AGILENT TECHNOLOGIES INC., $68.98, (New York symbol A; Shares outstanding: 316.0 million; Market cap: $21.8 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 dipped slightly, from $4.05 billion in 2014 to $4.04 billion in 2015 (fiscal year ends October 31). Due to acquisitions, revenue rebounded to $4.20 billion in 2016. It then rose to $4.47 billion in 2017, and reached $4.91 billion in 2018.

Earnings soared 194.8%, from $232 million in 2014 to $684 billion in 2017; with fewer shares outstanding, Agilent’s earnings per share rose at the faster rate of 204.3%, from $0.69 to $2.10. A one-time charge related to the new U.S. tax code cut Agilent’s earnings to $316 million, or $0.97 a share, in 2018. Without that charge, it earned $2.97 a share.

The company recently agreed to acquire BioTek Instruments. Based in Vermont, that privately held firm makes a variety of equipment for medical research labs, including cell imaging systems, microplate readers, washers, dispensers and automated incubators.

Agilent will pay $1.165 billion for BioTek. However, if you include tax benefits, the purchase price falls to $1.05 billion.

The company expects to complete the purchase in the next few weeks. BioTek will add $0.02 to $0.04 a share to Aglient’s earnings in the first year.

Meantime, the company earned $240 million in its fiscal 2019 third quarter, ended July 31, 2019. That’s up 10.6% from $217 million a year earlier. Due to fewer shares outstanding, earnings per share increased at a faster rate of 13.4%, to $0.76 from $0.67.

Those amounts exclude several unusual items such as the cost to integrate new businesses and changes to the U.S. tax code. On that basis, the latest earnings beat the consensus estimate of $0.72.

Revenue rose 5.9%, to $1.27 billion from $1.20 billion. That also beat the consensus forecast of $1.24 billion.

In addition to acquisitions, Agilent continues to invest heavily in developing its own products. Its research costs in the latest quarter rose 4.1%, to $101 million (or 7.9% of revenue) from $97 million (or 8.1%) a year earlier.

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. A recent study estimates that the global market for cannabis testing gear will rise from $824 million U.S. in 2016 to around $2.2 billion U.S. by 2025.

That growth is mainly because legalization will force growers to monitor the quality of their cannabis and keep out unhealthy contaminants. As well, pharmaceutical makers and medical research labs are 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. Revenue from services now account for about 25% of its total revenue.

Agilent now expects to earn between $3.07 and $3.09 a share for all of fiscal 2019. The stock trades at a reasonable 22.4 times the midpoint of that range. The $0.656 dividend yields 1.0%.

Agilent Technologies is a buy.

Comments

  • This article does not specify what kind of pot testing machinery is being developed; most likely it is the saliva testing variety which has already been rejected by several states etc. As fas I know there is only one company with patents which is developing a breathalyzer type pot use testing device and it is now in trials and seems to be effective. There is Canadian, American and German investments in the development of this device.

    • Thanks for your comment. As mentioned in the article, among Agilent`s 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 roadside testing machines you mention are another type of cannabis testing altogether, but are not among Agilent’s products. Thanks

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