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Agilent Earnings: China Challenges Cut Into Results and Guidance

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Agilent Technologies Inc
(A)

Wide-moat Agilent A delivered third-quarter results that were slightly better than expected, but they reflected weakness in the typically robust biopharma end market, which looks likely to continue especially in China and caused management to reduce its 2023 guidance for sales and adjusted EPS. While we have tinkered with our near-term assumptions slightly after this announcement, those changes did not change our $151 fair value estimate, especially considering that management also raised the key driver of our valuation—free cash flow—materially for 2023. Overall, we think Agilent’s long-term prospects remain intact, and Agilent shares continue to represent a growth at a reasonable price opportunity.

In the quarter, sales declined 2% on a core basis (adjusted for currency changes and acquisitions/divestitures), and adjusted EPS grew 7% to $1.43, which looked stronger than management was expecting ($1.36-$1.38), including margin expansion and share repurchases. However, Agilent’s largest end market, biopharmaceuticals, declined 8% with particular weakness in China (down 30%), similar to Agilent’s life science peers in recent months.

With these ongoing macrochallenges in China, management trimmed its fiscal 2023 guidance and now expects core revenue growth of just 0.8% to 1.5% (down from 3.0% to 4.5% previously) which looks lower than our previous expectation. Agilent also reduced its adjusted EPS guidance to $5.40-$5.43 (down from $5.60-$5.65,) which was also lower than our previous estimate. However, we use a discounted cash flow model, and Agilent actually increased its free cash flow guidance for 2023 by $250 million to $1.2 billion, which is higher than we anticipated primarily on more controlled capital expenditures and working capital management than previously expected. Overall, these near-term adjustments did not materially affect our fair value estimate for Agilent, which is more affected by our longer-term expectations that remain roughly intact.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Julie Utterback

Senior Equity Analyst
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Julie Utterback is a senior equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. Within the healthcare industry, she covers medical technology and service companies. She is also the chairperson of the equity research team’s capital allocation methodology.

Utterback joined Morningstar in 2005 as an equity analyst in the healthcare industry. At that time, she covered medical technology companies, including orthopedic device, medical equipment, and cardiac device firms. In 2010, she joined Morningstar's credit research team, initiating coverage of the entire healthcare industry and generally helping the organization expand and maintain its credit coverage across many industries. She held that senior credit analyst role until April 2019, when she returned to the equity team to cover medical technology and service companies.

Prior to joining Morningstar, Utterback was an equity analyst at State Farm Insurance for several years. She holds a bachelor's degree in finance from the University of Illinois Urbana-Champaign. She also holds the Chartered Financial Analyst® designation.

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