At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
D'oh! Why didn't I think of that?
Considering all the grief I give them for their sillier recommendations, and their own spotty track record making these recommendations, you may wonder if it's worth paying attention to Wall Street analysts at all. I can answer that question in one word: "Yes."
Why? Well, among other reasons because every once in a while, one of these Wall Street bank's research departments will kick out an idea that, in retrospect, seems to blindingly obvious that you wonder why you never noticed it yourself. Case in point: the buy recommendation that UBS just assigned to Agilent (NYSE: A ) .
"A" is for anonymous
As a maker of "bio-analytical" and "electronic" measurement solutions, Agilent straddles two seemingly distinct spheres of business. It's got its head in the tech sphere, competing with the likes of Avago (Nasdaq: AVGO ) , Teradyne (NYSE: TER ) , and Finisar (Nasdaq: FNSR ) in testing equipment for communications and semiconductor equipment. But it's got its feet firmly planted in the health-care industry, where Agilent's mass spectrometers, gas chromatographs, and lab robots go head to head with similar wares from Thermo Fisher Scientific (NYSE: TMO ) , Edwards Lifesciences (NYSE: EW ) , and Illumina (Nasdaq: ILMN ) . And I suspect that since Agilent's disparate endeavors don't easily fit in a "box" for me, I've never given much thought to the company before now.
That was a mistake. Turns out, if you take even just a little time to look at Agilent, the value of this stock is blindingly obvious. Selling for less than 13 times earnings today, Agilent trades at a lower P/E than Avago or Finisar, and while more expensive than Teradyne, analysts have Agilent pegged for a growth rate more than twice as fast. In health care, Agilent is cheaper than Thermo Fisher, but growing faster; slower than Edwards Lifesciences, but priced at about one-third Edwards' P/E; and sells for less than half the valuation of Illumina, while sporting a similar 20% growth rate. Essentially, no matter whom you match it up against, in either of its fields of activity, Agilent compares pretty favorably to the competition.
UBS points out the obvious
Seeing these same numbers, UBS tells investors: "We believe shares are attractively priced right now ... Agilent has only traded at 8x trailing EBITDA once before –the trough of the 2008/09 bear market– and Agilent outperformed the S&P by >2x through 2010. However, last downturn Agilent had roughly $1B in net-debt, but it now has roughly $1B in net-cash."
Right. I almost forgot to mention the balance sheet. Against less than $2.2 billion in debt, Agilent holds a cash balance of $3.1 billion. If you back this net cash out of the company's market cap, therefore, to arrive at Agilent's "enterprise value," the company's actually trading for about a 12x multiple to earnings today -- cheaper than any of the competitors named above, Teradyne excepted. (And again, remember that Agilent is predicted to grow nearly twice as fast as Teradyne's 12% projected long-term growth rate.)
According to UBS, Agilent's poised to enjoy "sustained momentum from: continued 4G/LTE wireless ramp, impressive smartphone unit growth, and China R&D trends." And even if the worst comes to pass, and the U.S. falls into recession, UBS notes that Agilent has significant exposure to the higher growth economies of Asia: "Roughly 40% of sales come from Asia (China represents ~1/5 alone), which has a solid FY12 macro outlook."
Foolish takeaway
UBS is right to recommend Agilent this week. A rock solid balance sheet, strong free cash flow (fully 90% of reported net income), low valuation, and high growth potential make Agilent a compelling buy opportunity. I only wish I had noticed it sooner myself.
Will Agilent deliver on its potential? Add it to your Foolish Watchlist and find out.
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