Hewlett-Packard has generated an impressive amount of media coverage since it parted ways with Agilent Technologies. HP's acquisition of Compaq made for some splashy headlines. By contrast, Agilent has garnered little attention, so it's time for a closer look.
Agilent's spin-off coincided with the end of the tech bubble. Its stock price soared past $150 per share in early 2001, up from $40, but now trades for a little less than $19 per share, up from a low of $11.30 earlier this year. Revenue declines and a dearth of profits have marred Agilent's life as a separate company.
The company has four divisions: Test and Measurement ($2.6 billion in revenue in 2002, 43% of revenue), Automated Test ($700 million, 12% of revenue), Semiconductor Products ($1.6 billion, 26% of revenue), and Life Sciences and Chemical Analysis ($1.1 billion, 19% of revenue). Test and Measurement offers test instruments for the electronics industry, mostly for the communications market, not a strong area these days. Automated Test designs and markets test equipment primarily for automated testing of semiconductors and printed circuit boards. Orders during the last quarter were at the upper end of the company's expectations, though a recovery in the semiconductor industry remains tentative. Semiconductor Products focuses on products such as optoelectronic semiconductors used in networking equipment as well as Fibre Channel controllers and image sensors used in digital cameras. Finally, Life Sciences and Chemical Analysis designs and markets analysis and test products for the biotech and pharmaceutical industries. Agilent is No. 1 or 2 in many of the markets in which it competes, but competition is fierce.
Agilent's revenue has declined from a peak of $9.4 billion in 2000 to $6.0 billion in 2002, a fall of almost 36%. The company was bloated when it was spun off from HP. Since then, it has struggled to realign its cost structure, going through two big rounds of layoffs that trimmed the payroll by more than 10,000 employees. Agilent is now on track to reach a break-even point of about $1.45 billion by the end of October, but it has lost money the last eight quarters. Fortunately, the balance sheet remains strong, with some convertible debt and a healthy amount of cash. The gross margin has contracted from about 51% in the company's first quarter of 2001 to 39% in its most recent quarter. Research and development as well as selling, general, and administrative (known as SG&A) expenses remain high relative to current sales. Agilent says R&D spending will be $1.0 billion this year, down from $1.1 billion in 2002. Meanwhile, more cuts in SG&A expenses are likely.
Management knows it must move the company to profitability and has done a respectable job so far. Revenue and orders have stabilized, too. What makes Agilent interesting is the possibility of substantial growth in earnings per share, if the company gets close to its long-term goal of normalized net margins of 11%. That won't happen in 2004, but it could in 2005 or 2006. Then, I believe the stock may trade at around $30 per share, but any setbacks in the economic recovery or the company's restructuring efforts will likely set back profitability goals. Overall, Agilent's stock is interesting, though risky.
William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at [email protected]. Bay Isle has no affiliation with nor does it receive compensation from any of the companies mentioned above. Bay Isle's current client portfolios may own publicly traded securities in one of more of these companies at any given time.