Research spending set to pay off for investors in Agilent Technologies

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The global market for cannabis testing equipment is projected to rise from $824 million U.S. in 2016 to around $2.2 billion U.S. by 2025. That should provide lots of growth opportunities for this testing-equipment manufacturer as its rising research and development spending pays off.


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AGILENT TECHNOLOGIES INC., $69.70, (New York symbol A; Shares outstanding: 317.5 million; Market cap: $22.1 billion, 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.

Agilent earned $228 million for the fiscal 2019 second quarter, ended April 30, 2019. That’s up 7.5% from $212 million a year earlier. Due to fewer shares outstanding, earnings per share increased at a faster rate of 9.2%, to $0.71 from $0.65.

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 fell short of the consensus estimate of $0.72.

Revenue rose 2.7%, to $1.24 billion from $1.21 billion. That also missed the consensus forecast of $1.27 billion.

The lower results are mainly due to weaker demand for lab instruments in China. In the past few years, food safety concerns spurred strong demand for that equipment, but sales have weakened lately. China’s plan to cut generic drug prices are also giving drugmakers less to spend on new equipment.

In addition to acquisitions, Agilent continues to invest heavily in developing its own products. Its research costs in the latest quarter rose 7.6%, to $99 million (or 8.0% of revenue) from $92 million (or 7.6%) 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.

The company now expects to earn between $3.03 and $3.07 a share for all of fiscal 2020. The stock trades at a reasonable 22.9 times the midpoint of that range. The $0.656 dividend yields 0.9%.

Agilent Technologies is a buy.


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