- Agilent is a leading life sciences tools provider selling into pharmaceutical, biotech, academic, diagnostics, and industrial end markets. Approximately 50% of sales are from instruments and 50% are from consumables and services. - The company is currently undergoing efficiency initiatives to raise operating margins from 19.6% to 22% by fiscal year 2017 through cost reductions and leveraging investments. However, the stock trades at a rich valuation of 20 times earnings compared to peers. - Risks include exposure to slowing growth in China, emerging markets, and chemical and energy end markets, which comprise significant portions of sales. Sales are also more dependent on economic growth than peers due to a higher percentage of instrument sales.

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