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Credit Suisse Initiates Coverage of Agilent with Outperform Rating

NEW YORK (GenomeWeb News) – Investment bank Credit Suisse today initiated coverage of Agilent Technologies with an Outperform rating and a $48 price target.

In a research report, analyst Vamil Divan noted Agilent's growing presence in the life science tools and diagnostics space, especially with the acquisitions of Dako and Varian during the past few years. And while weakness in the firm's Electronics Measurement Group led to a recent quarterly miss and reduction in guidance, "the resulting selloff provides a more attractive entry point for long-term investors," Divan said.

Agilent's Life Sciences Group and Chemical Analysis Group each represent about 20 percent of companywide revenues, according to Divan, and though both groups are heavily dependent on large capital equipment purchases and so are vulnerable to macroeconomic headwinds, Divan pointed to three factors that position the two groups for potential growth moving ahead.

First, each maintains strong positions in the markets in which they compete. There is also "significant opportunity for margin expansion" in these segments during the next two to three years.

About 40 percent of total revenues come from recurring revenues, providing stability, he said, while the 60 percent exposure to instrument sales represent upside potential.

In the instrument business, Divan said that Agilent dominates the gas chromatography space "and this dominance is expected to continue." Agilent also performed "very well" in the HPLC space in a survey conducted by Credit Suisse "and our respondents expect that Agilent will capture the majority of their new HPLC purchases in the next three years."

In the ultra-high performance LC arena, Waters remains at the top of the food chain and is expected to increase its market share, Divan said, while in the mass spectrometry space, Agilent is closing the gap between it and Waters.

Thermo Fisher Scientific is generally regarded as the market leader in mass specs, with Danaher's AB Sciex business and Bruker rounding out the top-five vendors in mass specs.

On Friday, sequestration took effect, resulting in budget cuts to the National Institutes of Health and other federal agencies. Divan assumes the cuts will remain in effect through the balance of Fiscal Year 2013, "although there is some potential for some of the cuts to be lessened or reversed should a broader, longer-term deficit reduction deal be reached over the summer."

Agilent, he added, is less likely to be affected by sequestration than Illumina and Life Technologies, but more so than other tools firms such as Thermo Fisher, Qiagen, and Waters.

In the event of a sustained economic recovery, Agilent's increased exposure to instrument sales as well as its greater footprint in various industrial end markets will allow the company to perform better than its competitors, Divan said.

"In addition, Agilent (along with Waters) has a stronger presence in higher-growth emerging markets, and this should help offset some of the challenges that the company may face in the developed world," he wrote in the report.

Regarding Agilent's Dako acquisition, completed in June, Divan said that Dako trails Roche in the immunohistochemistry space and Abbott in the FISH probes market. Nonetheless, "Dako significantly expanded Agilent's diagnostic portfolio … [and] Dako's clinical and regulatory expertise brought added value as Agilent works to move some of its other instruments into the clinical diagnostics arena."

Divan also cited Dako's expertise in obtaining regulatory approval of its products, including companion diagnostics, and said that knowledge "should significantly benefit Agilent as the company works to move more of its instruments and tests into the clinical diagnostics setting."

Dako today announced that the US Food and Drug Administration approved two assays for use as companion diagnostics for a Genentech drug targeting HER2-positive metastatic breast cancer.

In afternoon trading on the New York Stock Exchange, shares of Agilent were up 3 percent to $43.10.