What Siemens Results Mean to General Electric Investors

It's always interesting to hear what competitors are saying about end markets and their competitive positioning, and there aren't many more iconic rivals in the industrials space than General Electric Company  and Siemens. Let's look at Siemens' latest earnings and commentary on end markets, and compare where the two companies are headed.

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Is it Time to Buy Danaher Corp?

Unfortunately, Danaher Corp unveiled a second-quarter set of results that only sought to prove how choppy the global economic recovery has been. Its earnings were mixed, with its life science operations notably outperforming other industrial areas -- in common with what Pall Corporation  has been reporting. Moreover, the two principal areas of weakness should sound a note of caution to other investors.


Danaher Corp. saw weakness in its communications results -- test and measurement segment. This doesn't bode well for Agilent Technologies. Also, dental consumables sales disappointed; they looked more promising in the previous quarter. This isn't a good sign for dental distributor Patterson Companies, Inc..


Danaher Corp. disappointsGoing into the second quarter, investors had some cause for optimism. After all, in the first quarter, the company had recorded core revenue growth of 3.5% -- at the high end of its full-year forecast of 2%-4% core revenue growth. However, the second quarter saw core revenue growth slow to 3%.
In addition, Danaher Corp. saw margin growth held back by some setbacks in its communications and dental consumables businesses. Readers can see how this affected profit growth in the following chart.

Source: Danaher Corp. Presentations

In fact, the issues spoiled Danaher's otherwise excellent record of segmental operating margin expansion.


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Danaher Corporation Equity Research

Industrial conglomerate Danaher Corporation's  recent results were better than they superficially looked. Even though its second quarter guidance was lower than the market had hoped for, there is good reason to believe that Danaher has upside potential in 2014. Moreover, the earnings report suggested good things for other companies such as dental distributor Patterson Companies   in 2014, but less so for testing and measurement company Agilent Technologies . On balance, the positives outweighed the negatives, but is the company's stock still a good value?

3 reasons why Danaher's results were good
Danaher is the sort of company that often disappears under the radar of investors due to its low dividend yield and its P/E ratio of over 20 times current earnings. Moreover, its less than double-digit forecast EPS growth rate doesn't excite many. On the other hand, it's one of the best run companies in the industrial sector, and has relatively defensive end markets.

Focusing on the recent results, there are three key reasons why investors should like the company's stock.

 

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Agilent's Growth is Driven by Strong End Markets

Agilent $A is a pure analytical and electronic measurement company that provides solutions to diversified sectors involved in industrial output. I like this stock because it combines diversified cyclical growth and a secular growth story that is dependent upon new product development and regulatory and legislative drivers.

Agilent has been very active in research and development over the last few years and is starting to see the benefits of this. Furthermore, this transformation has seen the company shift from relying on over 40% of its revenues from the semiconductor industry towards becoming a truly diversified company. It is highly cash generative and promises strong growth.  It's time to take a closer look.

Agilent's Profit and Revenue Drivers

The three main divisions of Agilent are broken up as follows

Agilent	2010 Rev (bn)	2010 Op Margin	Growth Rates	Market Size (bn)
Electronic	2.8	16%	4-5%	12
Chemical	1.2	23%	5-6%	10
Life Sciences	1.5	15%	5-7%	19

In addition, Agilent sees its end markets as growing at 5-7% over the long term but the opportunity looks larger in the markets (particularly life sciences) where Agilent has the chance to expand market share. This doesn’t come without risk because the academic and governmental markets (not for profit) within life sciences could come under funding pressure going forward. However, this makes up only 8% of total revenues with the ‘for profit’ sector (biotech/pharma co’s) making up 14% of revenues. In addition, within life sciences, Agilent is seeing strong growth from the shift towards generics and biologic. Furthermore, Agilent is wel placed to benefit from the movement towards Ultra High Pressure Liquid Chromatography (UHPLC) from High Pressure Liquid Chromatography (HPLC).

Agilent is well diversified with the largest single segment (industrial, computing and semiconductors) only making up 21% of current revenues. The second largest segment is communications which is driven by technological change and LTE rollout as well as China’s 3G expansion. Agilent looks well placed in many markets.

Emerging Market’s are Key to Agilent’s Growth

Agilent are well placed in emerging markets and all three of the divisions are seeing an increase in the share of their revenues coming from Emerging Markets. In addition, Agilent’s strong market position in Electronic Measurement Group (EMG) puts them in good stead as manufacturing production shifts increasingly out to Emerging Markets like India, China etc. The return in investment is higher in EMG than in the other two divisions but Agilent is more established in this sector.

It is a similar story with the Chemical Measurement Group whereby there is strong growth from Asia. In addition, global trends are towards increased awareness of food safety and environmental awareness, which is all positive for measurement solutions like Agilent.

Somewhat surprisingly, Agilent is also seeing strong growth in Life Science’s group from Asia and this division appears to be the most exciting for Agilent overall. In essence, it is an opportunity that is categorised by the chance to grab market share in a fast growing (probably around GDP+3%) sector which is driven by proprietary technological change.

Agilent Stock Evaluation

Agilent currently trades at around $51.66 which gives it a market capitalisation of around $18bn and $17.3bn in Enterprise Value. The company is highly cash generative with diversified revenue streams and has invested impressively in R & D over the last few years. I like the diversification and the opportunities for upside potential given the tendency for greater quality control in increasingly complex manufacturing and research processes.

Analysts have forecasts of $2.88 and $3.28 for the year to Oct 11 and 12 respectively from $2.00 in 2010.  However, as ever, this doesn’t tell the full story. Free cash flow generation over the last three years has been $600m, $280m and $497m respectively and I think it is reasonable to expect around $900m for the year to Oct 2011. This puts Agilent on a FCF/EV of around 5.2% and that is too cheap for a company growing earnings in the mid teens.

I bought some with a target price of $58.