I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series.

Next up: Agilent Technologies (NYSE: A). Is this maker of diagnostic instruments the real thing? Let's get right to the numbers.

Foolish facts


Agilent Technologies

Motley Fool CAPS stars (out of 5) ***
Total ratings 499
Percent bulls 86.6%
Percent bears 13.4%
Bullish pitches 48 out of 59
Highest-rated peers Spectrum Control, Conolog., China 3C Group

Data current as of Oct. 7.

Fools have mixed feelings when it comes to Agilent, and with good reason. Even though the stock is up 22% over the past year, investors have endured stomach-churning volatility to realize that gain.

Those who've stuck with Agilent believe in the long-term importance of instrumentation for health care and scientific discovery, among other things.

"Health care is about to be transformed. I believe that the next generation diagnostic tests have huge potential to make money. Agilent is one company working on next generation diagnostic tests," Foolish investor ctrouper wrote last summer.

But is the opportunity large enough to support Agilent's pricey 28 price-to-earnings ratio? Analysts expect earnings to improve by 21% over the next year and 25% annually for the foreseeable future. Premium growth like that deserves a premium valuation.

The elements of growth


Past 12 Months



Normalized net income growth 24.5% (75%) 20.6%
Revenue growth 5% (22.4%) 6.5%
Gross margin 52.9% 51.1% 55.4%
Receivables growth 45.2% (22.7%) 4.8%
Shares outstanding 346.4 million 346.1 million 349.8 million

Source: Capital IQ, a division of Standard & Poor's.

And yet, as this table shows, Agilent's financials don't reflect a fast-growing business. Let's review:

  • Much as I like Agilent's improving earnings, it's worrisome to see receivables grow nine times faster than revenue. That can't continue.
  • I'd also like to see revenue growth improve. I mean, I'm glad to see Agilent back on the growth track after a rough 2009, but big winners tend to grow sales by more than 5% a year.
  • Gross margin is heading northward again, a good sign, but looking back to 2008, it also seems that Agilent's pricing power isn't what it once was.

Competitors and peers checkup


Normalized Net Income Growth (3 years)

Affymetrix (Nasdaq: AFFX) Not measurable
Agilent Technologies (8.1%)
Celera (Nasdaq: CRA) Not applicable
Illumina (Nasdaq: ILMN) 30.4%
National Instruments (Nasdaq: NATI) (4.1%)
Teradyne (NYSE: TER) 24.9%
Thermo Fisher Scientific (NYSE: TMO) 31%

Source: Capital IQ. Data current as of Oct. 7.

Color me nonplussed by this table. Not only has Agilent suffered a three-year decline, but competitors Teradyne and Thermo Fisher have enjoyed a growth renaissance over the same period. Agilent looks like a laggard by comparison.

Digging further, Agilent has only slightly better returns on capital than does Motley Fool Inside Value pick Thermo Fisher Scientific, and badly trails Teradyne in the same metric. Yet, in terms of P/E, it's Agilent that is the most expensive stock among these three. Doesn't seem fair, does it?

Grade: Unsustainable
I'm all for buying growth stocks with durable, numerically obvious competitive advantages. Agilent doesn't seem to have that. Instead, it looks like a fair-priced stock that's riding a wave of needed innovation in diagnostics and instrumentation. I wouldn't short it, but I also wouldn't buy.

What I would do is join my value brethren in owning Thermo Fisher Scientific. I'm also inclined to bet on Teradyne, if only because there appears to be little downside risk at its current valuation. I've rated both stocks to outperform in my Motley Fool CAPS portfolio.

Now it's your turn to weigh in. Do you like Agilent Technologies at these levels? Let the debate begin in the comments box below. You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.

For further Foolishness about Agilent Technologies:

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Thermo Fisher Scientific is a Motley Fool Inside Value pick. Illumina and National Instruments are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Fool is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.