Why Insiders Like Agilent
Wall Street is not too fond of Silicon Valley right now, least of all of Agilent Technologies (A ). Spun off in 2000 by Hewlett-Packard, this leading maker of test and measurement gear wounded the Street on Aug. 19 with a surprisingly bad quarterly result. Traders' reaction was swift and merciless--while analysts cut their profit estimates and Morgan Stanley downgraded the stock. Agilent is now trading near 16 a share (chart), less than half its 2002 high of 38 and far below the 162 it commanded back in the Loonyolithic Era, circa early 2000.
Yet to me, all of this spells a reasonable opportunity for individual investors, many of whom can afford to be more patient than Wall Street pros. Chief Executive Ned Barnholt makes no bones about today's business conditions--very tough, with weak demand and soft pricing, he told me--but that won't last forever. Meantime, Agilent is financially strong and is cutting costs, even as it puts $1 billion a year into research and development. While HP went off to the computer and printer wars, Agilent remains focused on HP's traditional industrial customers.
Much of Agilent's enduring strengths are being missed right now as the market focuses on the current fiscal year. The big problem in Agilent's fiscal third quarter, which ended July 31, was Project Everest, a consolidation of its 2,200 software systems to under 20. Ensuing confusion meant lost orders and revenue. Most of that may be recouped in the current quarter. Just the same, for the fiscal year ending Oct. 31, Agilent now expects revenue of about $5.9 billion, down 30% from 2001, when it earned $174 million. Its net loss this year may top $900 million. At its peak in fiscal 2000, Agilent collected nearly $9.4 billion in revenue and netted $757 million.
The current view is ugly, no question. Yet Agilent is showing clear signs of better results ahead. For one thing, Agilent sells its test gear and semiconductor components to a wide variety of blue-chip customers, from General Electric (GE ) and IBM (IBM ) on down. And not all of them are such struggling Silicon Valley cousins as Cisco Systems (CSCO ) or telecom survivors like Lucent Technologies (LU ), Motorola (MOT ), and Nortel Networks (NT ). Agilent also enjoys longstanding relationships with aerospace and defense contractors such as Boeing (BA ). Giants including Royal Dutch/Shell (RD ), ExxonMobil (XOM ), and DuPont (DD ), and biotech's Abgenix (ABGX ) and Incyte Genomics (INCY ), also use Agilent's analyzers and sundry devices. Overall, third-quarter orders grew 10%. That meant bookings in the period were 5% above billings. Modest, except that in the comparable quarter a year ago, new orders ran 27% below billings.
At the same time, Agilent has already taken $1.2 billion out of yearly costs, in part by shuttering plants and reducing its payroll by 7,000, to about 37,000. Barnholt expects this figure to edge below 36,000 in the next quarter or two, and is aiming to cut a further $200 million in annual expenses. While research spending has not been sacrosanct, Barnholt told me: "We've tried to protect R&D'S staffing as much as possible. It's down just 10%, to 12%, vs. about 18% overall." Through July this year, Agilent had won 104 patents, quite a jump from the 85 it got in all of 2001.
Cash flow from operations should turn positive early in fiscal 2003, if not before. Any strong growth in revenues would bring black ink back to the bottom line, too. When orders and sales turn up in earnest is anybody's guess. But until they do, Agilent can rest on a solid balance sheet. Its $2.1 billion in cash easily covers the $1.2 billion owed in debt--on which it pays just 3% interest.
Prospects for Agilent's stock haven't escaped the company's insiders. Notably, Chief Financial Officer Adrian Dillon in June reported having bought 18,000 shares at $26.75. As bullish as I find such an endorsement from any company's CFO, I am even more compelled by the actions of Agilent's rank-and-file employees. In the first half of fiscal 2001, they spent $61 million to buy shares of common stock via the company's employee stock-purchase plan. In the first half of fiscal 2002, they spent $72 million, an extra 18%.
Because the stock price in this fiscal year has on average been a lot lower than it was in fiscal 2001, I estimate that Agilent employees collectively accumulated more than 80% extra shares in the company than they did during the comparable period a year ago. Now, consider that they did this even as Barnholt was busy eliminating one in every six positions at the company. That's what I call an inside tip.