Contents
I last reviewed Agilent (A) in this February 28, 2025 post at which time the most current financial information was for Q1 2025. With the recent release of Q2 and YTD2025 results and an update to the FY2025 outlook, I revisit this existing holding.
Business Overview
A has the following 3 reportable business segments:
- life sciences and applied markets;
- diagnostics and genomics; and
- Agilent CrossLab.
A comprehensive overview of the business and each segment plus the risk factors is found in Item 1 within the FY2024 Form 10-K, (see SEC Filings). The company's website also includes a wealth of information.
Growth Potential
The company's website currently reflects that A serves large, attractive markets with a $65B opportunity, growing 4-6%. With FY2024 revenue of ~$6.5B, A has ample growth opportunity.
Financials
Q2 and YTD 2025 Results
Material related to the Q2 2025 earnings release is accessible here. The investor presentation reflects the results by by geography, product type, end market, and segment.
Operating Cash Flow (OCF), Free Cash Flow (FCF), and CAPEX
In recent posts I explain my rationale for deducting share-based compensation (SBC) from a company's OCF to determine FCF. The following reflects A's FCF using the conventional and modified methods. Fortunately, A's SBC is nothing remotely close to that of many technology companies!
In the first half of FY2025, A has:
- generated ~$0.652B in net cash provided by operating activities; and
- disbursed ~$0.211B in payments to acquire property, plant and equipment
resulting in ~$0.441B of FCF. If we deduct ~$0.07 in share-based compensation (SBC), A's modified FCF is ~$0.371B.
Management's FY2025 outlook includes ~$1.5B - ~$1.6B of OCF and CAPEX of ~$0.45B. This would suggest A's FCF calculated under the conventional method might be ~$1.05B - ~$1.15B.
If SBC is similar in the second half of FY2025 as in the first half, FY2025 SBC could be ~$0.14B thus lowering FY2025 FCF to ~$0.91B - ~$1.01B.
Capital Allocation
A's capital allocation priority is to reinvest in the business. Share repurchases and dividend distributions are also a component of A's capital allocation.
Q3 and FY2025 Guidance
The following reflects A's Q3 and FY2025 guidance.
A is maintaining its core growth outlook for the year, and increasing reported revenue guidance by $50 million to reflect incremental FX benefit. This results in an increase to the full year reported revenue to $6.73B - $6.81B, increasing reported growth to 3.4% - 4.6%. Currency is now expected to represent a 1.1% headwind for the year versus a prior 1.9% headwind, while M&A guidance is unchanged at 2% - 2.2% revenue. Core growth is still expected to be 2.5% - 3.5% for the year.
Prior guidance is provided for comparison.
Risk Assessment
A's net debt to adjusted EBITDA ratio is 1.0 at the end of Q2 and Q1 2025 versus 1.1 at FYE2024 and 0.6 at the end of Q3 2024.
- At the end of Q2 2025, A had $0.146B of short-term debt and $3.349B of long-term debt.
- At the end of Q1 2025, A had $0.016B of short-term debt and $3.347B of long-term debt.
- It had $0.045B of short-term debt and $3.345B of long-term debt at FYE2024.
- At the end of Q3 2024, A had ~$0.795B of short-term debt and ~$2.137B of long-term debt.
Investors need to remember that A completed a couple of acquisitions which I touched upon in prior posts (Sigsense Technologies and BIOVECTRA). In FY2024, A disbursed ~$0.862B to acquire businesses and intangible assets, net of cash acquired. These acquired businesses, however, contributed little to A's earnings.
A's credit ratings remain unchanged from the time of my prior posts. A's website currently reflects the following credit ratings.
- Moody's completed its most recent review on May 3, 2023 at which time A's rating was upgraded from Baa2 to Baa1. The outlook is stable.
- S&P Global completed its most recent review on April 14, 2025 and affirmed A's BBB+ rating with a Positive outlook.
- Fitch completed its most recent review on October 31, 2024 and affirmed A's BBB+ rating with a Stable outlook.
All three rating agencies define A as having an adequate capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of A to meet its financial commitments.
Dividend and Dividend Yield
A's dividend history is accessible here. It does not, however, currently reflect the quarterly dividend of $0.248/share announced on May 21. This quarterly dividend is payable on July 23, 2025 to all shareholders of record as of the close of business on July 1, 2025.
The dividend yield is typically below 1% and should have little bearing on whether to invest in the company or not. Investors should expect the bulk of A's future total investment return to continue to be predominantly in the form of capital appreciation.
The Inflation Reduction Act of 2022, which was enacted into law on August 16, 2022, imposes a nondeductible 1% excise tax on the net value of certain stock repurchases made after December 31, 2022. During FY2024, A recorded the applicable excise taxes payable of ~$10 million as an incremental cost of the shares repurchased and a corresponding liability for the excise tax payable in other accrued liabilities on its consolidated balance sheet. In comparison, in FY2023, A recorded excise taxes payable of ~$3 million related to shares repurchased in 2023 and paid the tax in 2024.
Despite this nondeductible 1% excise tax, I much prefer that a company repurchase undervalued shares versus distributing dividends.
As a Canadian resident, I incur a 15% dividend withholding tax on any dividends received in a taxable account. Furthermore, I have to report dividend income on my annual tax return. I am not seeking additional annual income and much prefer deferring any tax liability for as long as possible.
The weighted average shares outstanding (in millions of shares) in FY2013 was ~345. In FY2024, Q4 2024, Q1 and Q2 2025, it was ~291, ~287, ~287, and ~285.
Repurchases in FY2018 - FY2024 (in $B) were 0.422, 0.723, 0.469, 0.788, 1.139, 0.575, and 1.15. Unfortunately, A's shares were generally overvalued with the exception of the last couple of years.
The 2024 Stock Repurchase Program that authorizes the repurchase of up to $2B was approved by the Board in May 2024 and became effective on August 1, 2024.
In the first half of FY2025, A has repurchased ~$0.255B versus ~$0.230B in the first half of FY2024. This was partially offset by $70 million and $75 million share-based compensation (SBC) during the same periods. For comparison, in Q1 2025, A repurchased ~$90 million of its shares but this amount was partially offset by ~$40 million of SBC.
Management's FY2025 guidance includes anti-dilutive share repurchases at a minimum and ~285 million in diluted outstanding shares.
Valuation
In my recent HEICO (HEI) post, I note that it does not incur significant annual CAPEX to remain operational. Union Pacific (UNP) and A, however, both do. This explains why I do not use HEI's earnings to gauge its valuation.
A's depreciation and amortization in FY2022 - FY2024 and the first half of FY2025 are ~$0.317B, ~$0.271B, ~$0.257B, and ~$0.145B. CAPEX during the same periods are ~$0.291B, ~$0.298B, ~$0.378B, and ~$0.211B. Looking at these results, we see that the ongoing CAPEX is not that significantly different from the combination of depreciation and amortization that is deducted on the Income Statement to determine Net Earnings.
A's FY2025 adjusted diluted EPS outlook is $5.54 - $5.61. It generated $1.31 in each of Q1 and Q2 and the Q3 outlook is $1.35 - $1.37 for a total of ~$3.98. This means it will need to generate ~$1.56 - ~$1.63 in Q4 to achieve its FY2025 target.
Using the current ~$113.30 share price, the forward adjusted diluted PE is ~20.2 - ~20.5.
A's forward-adjusted diluted PE levels using this share price and the current broker estimates are:
- FY2025 - 20 brokers - ~20.3 using a mean of $5.57 and low/high of $5.47 - $5.61.
- FY2026 - 20 brokers - ~18.7 using a mean of $6.07 and low/high of $5.80 - $6.22.
- FY2027 - 14 brokers - ~16.9 using a mean of $6.70 and low/high of $6.49 - $6.86.
Earlier in this post, I estimated that A's FY2025 FCF calculated under the conventional method might be ~$1.05B - ~$1.15B. The outlook is for ~285 million diluted outstanding shares meaning, A could generate ~$3.68 - ~$4.04 of FCF/share. With shares currently trading at ~$113.30, the forward P/FCF is ~28 - ~30.8.
Under the modified method of calculation FCF, I estimate A will generate ~$0.91B - ~$1.01B. Divide this by ~285 million diluted outstanding shares and we arrive at a FCF/share range of ~$3.19 - ~$3.54. With shares currently trading at ~$113.30, the forward P/FCF is ~32 - ~35.5.
In my prior post, I wrote:
A's FY2025 guidance still calls for an adjusted diluted PE range of ~$5.54 - ~$5.61.
On February 27, I acquired an additional 100 shares @ ~$127.30 resulting in a forward adjusted diluted PE range of ~22.7 - ~23; the share price at the time of my prior review was ~$134.
A's forward-adjusted diluted PE levels using my ~$127.30 purchase price and the current broker estimates are:
- FY2025 - 20 brokers - ~22.9 using a mean of $5.57 and low/high of $5.54 - $5.63.
- FY2026 - 20 brokers - ~20.8 using a mean of $6.11 and low/high of $6.00 - $6.22.
- FY2027 - 15 brokers - ~19 using a mean of $6.71 and low/high of $6.51 - $6.95.
Management's FY2025 guidance calls for OCF of $1.6B - 1.7B and CAPEX of $0.45B.
SBC in Q1 2025 was $40 million. If A's quarterly SBC continues at this pace for the remaining quarters in FY2025, FY2025 SBC will be $0.16B. This is substantially higher than in recent prior years so I envision a scale back over the remaining 3 quarters and use $0.14B to calculate A's FY2025 FCF.
Subtracting CAPEX of $0.45B and $0.14B of SBC from the $1.65B OCF mid-point guidance, we get ~$1.06B of FCF. The FY2025 diluted share count outlook is 286 million shares so $1.06B/286 million shares equals ~$3.71 of FCF/share.
NOTE: A's guidance calls for anti-dilutive share repurchases at a minimum. If shares remain undervalued, I anticipate the company may repurchase more than the minimum number of shares.
Divide my ~$127.30 purchase price by ~$3.71 and we get a P/FCF of ~34.3.
The consensus average price target from analysts is ~$154. I, however, continue to deem ~$140 to be a fair value. The difference between my fair value estimate and my February 27 purchase price suggests a ~10% upside before reaching fair value (($140 - $127.30)/$127.30).
Final Thoughts
My exposure now consists of 601 shares in a 'Core' account the FFJ Portfolio at an average cost of ~$121.76; A was not a top 30 holding when I completed my 2024 Year End Portfolio Review.
I continue to be of the opinion that ~$140 is A's fair value. While tempting to add to my exposure at ~$113.30, I am satisfied with my current exposure. Furthermore, there are other companies in which I want to acquire additional shares. Although their valuations are less than attractive, I want to have sufficient liquidity on hand in the event their valuations retrace to enticing levels.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long A.
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your research and due diligence. Consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.
