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Goldman Sachs Upgrades Agilent, Bruker; Lowers Cepheid, LabCorp

NEW YORK (GenomeWeb News) – Goldman Sachs has upgraded the stock of Agilent Technologies and Bruker, but downgraded Cepheid and Laboratory Corporation of America.

In a report released Sunday about the impending fiscal cliff as well as the global macroeconomic picture, analyst Isaac Ro upgraded the stocks of both Agilent and Bruker to a Buy rating from Neutral, but lowered Cepheid to Neutral from Buy and LabCorp to Sell from Neutral.

While Ro's upgrade of Agilent was in large part due to what he believes will be improvements in the Santa Clara, Calif.-based firm's Electronic Measurement group, he noted that Agilent is "well-positioned to gain market share in [the life sciences] due to acquisitions, a broader [Electronic Measurement] footprint, and improved product offerings." He also took note of the firm's recent $2.2 billion buy of Dako, which is expected to create a platform from which Agilent can build its diagnostics business.

"Given the strength of competition in anatomic pathology (Danaher, Roche, and Thermo Fisher Scientific), we would expect a multi-year process toward introducing a new product cycle and gaining share," he said. "As such, we would view news on growth and new product launches in FY2013 as a positive. From here, we expect Agilent to take a more conservative approach to building out the diagnostics business with smaller tuck-in deals."

Ro raised the 12-month price target on Agilent's shares to $49 from $42.

Shares of Agilent on the New York Stock Exchange rose 4 percent to $37.40 in afternoon trading. The company will report its fourth-quarter and Fiscal Year 2012 financial results after the close of the market today.

In upgrading Bruker, Ro called the company a "turnaround story" and cited healthy organic growth, margin expansion, and an "attractive" risk/reward profile.

During the past three quarters, Bruker has grown revenues nearly 13 percent organically, significantly higher than competitors, Ro said, adding that new products and share gains should offset near-term headwinds.

"Additionally, we believe the company is steadily realigning its geographic mix away from Europe (where the company has group-high exposure) and into emerging markets, where long-term trends remain very favorable particularly given [Bruker's] broad exposure to key industries in China’s most recent five-year plan," he added.

China issued its most recent five-year plan in March 2011 with scientific development and other focuses likely to benefit companies operating in the life science tools space, Ro said.

While Bruker has the lowest operating margins among companies in Goldman Sachs' portfolio of life science tools companies, Ro said that new CFO Charlie Wagner has a proven track record and has "already offered broad strokes illustrating a multiyear plan to improve margins … As a result, we believe the disappointing margin performance in recent quarters will begin to improve under this change of leadership."

At an investor conference in September, Wagner outlined some of the changes being implemented at the Billerica, Mass-based firm, including centralizing operations and moves to drive up profitability.

Ro increased the 12-month price target for the firm's stock to $19 from $13.

Bruker's shares on the Nasdaq were up about 4 percent at $14.09 in afternoon trading.

If Bruker is a turnaround tale, Cepheid is a "show-me" story, Ro said, that will need several quarters of "solid management execution" after several recent setbacks. In addition to lowering the Sunnyvale, Calif.-based firm's rating, he reduced the six-month price target on its stock to $32 from $42.

His downgrade comes less than a week after Mizuho upgraded Cepheid to Buy.

Ro noted recent problems the company has faced including interruptions in the supply of its Xpert cartridge parts that caused the company to miss analyst estimates for the third quarter.

While Cepheid has said that the manufacturing issues have resulted in limited customer attrition, the problem has presented "a sizeable distraction for the sales force," which has had to concentrate on maintaining customer relationships rather than placing new systems and expanding the menu, Ro said.

"With a typical sales cycle of roughly nine months, we see modest risk beginning in 2Q13 to Street system placement assumptions," he said. "While we believe [Cepheid] deserves to trade at a premium to [other diagnostics firms in Goldman Sachs' portfolio] and growth peers across MedTech given our above-peer growth estimates, we believe recent multiple contraction is warranted given execution risk."

He also said that in spite of several new products in Cepheid's pipeline, they are not expected to hit the market until mid-2013 and 2016-2017, and near-term catalysts to potential growth in Cepheid's revenues are not apparent. US Food and Drug Administration clearance of Cepheid's chlamydia/gonorrhea test is expected soon, he added, but Wall Street estimates already include the effects of an approval.

Cepheid shares on the Nasdaq were down almost 4 percent at $29.46 in afternoon trading.

Ro also downgraded LabCorp to Sell and reduced the six-month price target on its shares to $83 from $85. Though the implementation of the Affordable Care Act will proceed with the re-election of President Obama, the legislation will have little positive effect on LabCorp, Ro said. Increased insurance coverage may drive up test volume, but Ro questioned the profitability of those revenues and the impact on the company's profits and losses.

He further noted that the Burlington, NC-based firm's earnings before interest and taxes have been stagnant and "appears unlikely to improve materially even under ACA." As a result, EPS growth has resulted from share repurchases, but Ro's analysis indicates that even should LabCorp repurchase additional shares "there is likely limited upside to multiples."

In afternoon trading on the New York Stock Exchange, LabCorp shares were up a fraction of 1 percent at $83.13.

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