1. Agilent(A $37.65) – Sell Short February2, 2016
Market cap $12.3 Bil
Dividendyield1.22%
Analystratings: Buys10, Holds 8, Sells 0 (neutral/positive)
Short interest: 2%
AgilentisaleadingLife SciencesToolsprovider,sellingintothe pharma/biotech,academic/gov’t,
diagnostics/genomics,andapplied (more industrial)endmarkets. Salesare approximately 50%
instruments(lumpy,biggerinvestments)and50% consumablesand services (lowerpricedandrecurring,
more stable).
Agilentisthe life science toolscompanypost-spinoff of Keysight(KEYS, the formerElectronicMeasurement
Group segmentof Agilent). WithanewCEO (fromwithinAgilent,seemslike astraight-shooter),itis
currentlyundergoingaprogramof efficiencyinitiativesto become more costeffective, leverageSG&A and
R&D investments, leanouttheirsupplychain,andasa result, Agilent’sgoal isto raise operatingmargins
from19.6% in FY’15 (Oct.) to 22% inFY’17. In addition,theyare focusingonorganicgrowthwith
investmentsinnewproductsandchannels. Also,Agilentisplanningtoreturn$635mil in capital (share
repoand dividends) toshareholdersinFY’16(vs.$400mil in FY’15).
The problemsIhave withAgilentare the following:
1. Valuation: Agilentistradingat20x FYOct’16 epsguidance of $1.85-1.91 (+6-10%), withcore
revenuesgrowthof 4.0-4.5%organic constantcurrency. I thinkthat isa richmultiple comparedto
peers,like TMO,whichjust lastweekgave new FY’16 eps,anda P/Emultiple of 16.7x,withthe
same organicrevs growthof 4% cc. Yes,TMO’s revsare 4x Agilent’s,sotheyare expectedtogrow
slower,andmaybe get a lowerP/E,but20x eps for Agilentisexpensivetome. Inaddition,when
comparingAgilent’sandTMO’ssegments’growthguidance,Agilent’sare equal toorhigheronall,
whichmay meanthey’re beingabittooaggressive (ie:Agilentmayneedtocutguidance on Feb.
16th
whentheyreportQ1 earnings).
2. Chinaexposure isapprox. 16%of revs,certainlyapotential concerngiventhe economicslowdown
there (despitethe buildoutof healthcare/life sciencesinfrastructure andfood,water,airpollution
concerns).Revsin2nd Half FY’15 grew ~DD%.
3. EmergingMarketsexposure isapprox.25-30% of total revs. Economiesthere are slowingtoo.
4. Chemical andEnergyexposure isapprox. 24% of revs – these endmarketsare currentlyweak,and
guidedtoflatinFY’16. However,there have alreadybeenmassivecapex cutsfor2016 byE&P
companies,bigandsmall,sothisguidance mayneedtocome down.
5. Agilentsalesare comprisedof ~50% instruments (whichare typicallymore lumpyanddependent
on bettereconomicgrowth),and50% recurringrevsand consumables(more stable),while TMOis
~75-80% recurring/consumables(more predictable).

2. Balance sheet: Cash$2.1 Bil;Total debt$1.65 Bil – good position
Valuationand Bottom Line: WithFY’16 revsguided+4.0-4.5% organiccc (deceleratingfrom+6.4% organic
cc inFY’15) and epsguidedto$1.85-1.91 (+6-10%), Agilent($37.65) trades at a very highmultiple of 20x
P/E,still pricingin,Ibelieve,takeoverpotential byDHRandTMO from lastyear. DHR recentlymade ahuge
acquisitionof PLL,whichtakesthemoutof the runningfornow,while TMOis still digestingthe LIFE
acquisition. Ithinkinthe near-to-mid-term(let’ssaythe next6-9months) Agilentcouldtrade downto
eitherTMO’smultiple of 16.7x (stockprice of $31.40, or -17% fromhere),orevendownto 15x ($28.20, or -
25%) if thingsgetprettyugly,and bythen, earningsestimateswouldprobablybe lower. A pointof
reference,duringthe Europeanfinancialcrisisof 2011 and2012, thissector tradedat 12-13x eps,and
nobodywantedthem. Lookingouta year,streetestimatesforAgilentFYOct’17epsare $2.19 (+16%),
puttingthe currentmultiple at17.2x, prettyrichfor twoyearsout. If I’mwrong, and revenuesgrowth
continuesstrong,withnice o.m.improvement, andthe stockmaintainsa20x P/E, Agilentcouldtrade at
around$44 a year fromnow(+17% fromhere). Short now.
Doug Sokolower
917-494-2030
dsokolower@yahoo.com