A European Industrial/Health-Care Conglomerate on Sale

Jeremy Glaser: For Morningstar.com, I am Jeremy Glaser. I am pleased to be joined today by Bill Buhr. He is a healthcare analyst at Morningstar. We're going to take a closer look at European health-care/industrial name, Agfa-Gevaert.

Bill, thanks for joining me.

Bill Buhr: Thanks for having me.

Glaser: So, can you tell us a little bit about what this company does?

Buhr: Sure. Agfa has three primary divisions within the company. They have a graphics division, which has a lot of printing-related products. Their healthcare group has diagnostic imaging and healthcare IT solutions. Then they have a specialty group, it's the smallest of the three, which has a lot of film-related products. This company has roots that goes back to the 1800s, so they've been doing this for quite a long time.

Glaser: Now, do you thing this stock looks cheap right now?

Buhr: I do. After the third quarter earnings release, which in the market's defense was not very good, the stock sold off about 20% and it currently trades at about 5.5 times our forward 2010 earnings estimates and at about 50% of our fair value.

What I think is going on right now is the company was punished, I think, unfairly by third quarter results. They are still on pace. The company has gone on record of saying they are still on pace to meet fourth quarter and full year guidance, and we're giving them credit for that.

One of the issues that's going on right now is that silver prices have really hurt the company. Just to back up a bit, silver is a primary input into a lot of their film products. So, silver prices have obviously gone crazy this year. The company doesn't hedge and it's caused a lot of volatility around earnings. The company's plan is to actually try to pass those costs on to their customers. Over time, as the analog to digital conversion happens, silver will be less of an issue for them, but right now, it's really a short-term issue that's hurting them.

The final kind of shoe to drop is that the capital spending environment in Europe has been really weak and we think it's actually going to get better in 2011. So, between those three things, I think an overreaction to third quarter, the silver issue and a better environment in 2011, we think that the company could come out of this looking pretty good.

Glaser: Certainly a lot of these issues could persist for sometime. Silver is, obviously, always fluctuating. What do you think are some of the catalysts that could really see the stock move up?

Buhr: Sure. I think a better fourth quarter. To me at this point, this is a "show me" story. The company has said that they are on chart, they are on pace to meet full guidance. They think they can pass along the rise in silver cost to their customers. So, my thoughts are kind of proven. I think if they do, even if they have a quarter that meets expectations, I think the stock could get really a nice short-term bounce.

Then beyond that there is a lot of other growth drivers, I think, that could really help this company. They have an emerging market story that's playing out. They have opportunities in China and Brazil. Within healthcare, there is a growing demand for diagnostic tests. Healthcare IT is becoming a bigger issue. Finally, they've done a lot with their cost infrastructure over the last couple of years to pare it down and to make them a leaner operating entity, which I think will really help.

Glaser: What do you think could go wrong then?

Buhr: What could go wrong is silver continues to climb, the customers revolt, they are not able to pass those costs along, and then I'd also say, the capital spending environment in Europe continues to be slower than expected, the combination of those two things, I think, could bring a couple more quarters of pain. So that's what we're on the lookout for. Those events make this a much trickier investment story.

Glaser: In your mind the potential upsides outweigh the potential downsides?

Buhr: I do. I think there is a lot of upside. I mean, again, this company couldn't be cheaper right now. I'm not in the business of making commodity predictions, but let's face it, silver has really climbed to an all-time high. I don't know how much higher it can go. Again, I think the company has set themselves up for some positive outcomes here in the next year or two.

Glaser: Bill, thanks so much for talking with me.

Buhr: Thanks for having me.

Glaser: For Morningstar.com, I'm Jeremy Glaser.