Instrumental Health
In this edition of the Smart Investor newsletter, we examine the stock of a life-sciences champion. But first, let’s delve into the latest Portfolio news and updates.
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Portfolio Updates
❖ Microsoft (MSFT) signed a 20-year power purchase agreement (PPA) with Constellation Energy to help restart a unit of the Three Mile Island nuclear plant in Pennsylvania, shut down in 2019 due to poor economics. The Three Mile Island Unit 1, expected to be operational by 2028, will supply the tech giant with carbon-free energy to power its data centers, supporting its AI development ambitions and sustainability goals. Constellation Energy said it will invest $1.6 billion to revive the plant. The deal is the largest PPA in the history of nuclear energy. Hyperscalers are increasingly looking out for nuclear energy supply as accelerating AI data-center growth requires massive amounts of energy and threatens tech leaders’ ambitions to reduce carbon emissions.
In other company news, MSFT was downgraded by D.A. Davidson from “Buy” to “Hold” in a rare occurrence for the stock. The firm’s analysts cited two main concerns: increasing competition taking on Microsoft’s AI lead, and its growing reliance on Nvidia for hardware to run the advanced tech. D.A. Davidson said that Amazon (AMZN) and Alphabet (GOOGL) – which are also held in the Smart Portfolio – are catching up to Microsoft in terms of AI data centers, helped by deployment of their custom chips at lower costs than those supplied to MSFT by Nvidia. All leading Wall Street houses except D.A. Davidson and Guggenheim rate MSFT a “Buy,” penciling in an average upside of ~15% in the next 12 months.
❖ According to a report in The Wall Street Journal, Taiwan Semiconductor Manufacturing (TSM) and Samsung Electronics have been discussing building semiconductor megafactories in the United Arab Emirates. The discussed project, valued at over $100 billion, has the potential to transform the semiconductor industry over the next several years. According to the reports, most of the funding would come from UAE sources, including Abu Dhabi’s massive sovereign wealth fund that has been tasked with supporting domestic semiconductor manufacturing. TSM is the world’s largest advanced chip foundry, producing the majority of the AI semiconductors designed by Nvidia, AMD, and other leading chip designers. As global demand for advanced chips accelerates, companies along the AI hardware supply chain have been looking to expand production to satisfy the needs of the AI boom. If TSM and Samsung proceed with the project, this could help propel the industry far beyond its current growth rates.
❖ Alphabet (GOOGL) won a legal battle against the European Union over a $1.7 billion fine levied by EU regulators for the alleged prevention of competition in third-party website ads. The court’s decision in favor of Alphabet partly offsets a hit suffered in another EU court battle, in which the tech giant was punished for abusing its monopoly powers with a hefty penalty.
❖ Lam Research (LRCX) will pay an increased dividend on October 1st. The quarterly payout of $2.30 per share – up from $2 previously – will be paid to shareholders of record as of September 17th. In addition, LRCX shares are scheduled to split 10-to-1 on October 3rd. Despite some price-target reductions in recent weeks, top Wall Street analysts foresee an average upside of 34% for the stock in the next 12 months.
❖ Texas Pacific Land (TPL) has been one of the Portfolio’s strongest performers, rising by over 60% since its purchase on June 5th. The company’s stock surged by almost 20% in the past two weeks as the company’s insiders acquired shares of TPL and its institutional investors increased their holdings, signaling confidence in its further outperformance.
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Portfolio Stocks Under Review
❖ Super Micro Computer (SMCI) remains under review despite its strong rebound in the past two-and-a-half weeks. The upswing followed a turbulent period for the stock, which included strong hits to investor sentiment stemming from a short-seller’s report and an SEC filing delay. Although Supermicro confirmed that there would be no changes to its financial results or forward guidance, many analysts – including JPMorgan, Bank of America, and Barclays – have cut their price targets citing the heightened uncertainty.
On the other hand, the stock was strongly lifted by GlassHouse Research’s report, dismissing Hindenburg’s allegations and saying that the filing delay is “a precautionary measure.” The forensic accounting firm announced a long position in SMCI “for the foreseeable future,” stating a highly favorable risk-reward ratio and valuation. In addition, Supermicro was recently cheered by Needham analysts, who dubbed it “the coolest kid in AI town” and a major beneficiary of the rapidly accelerating investments in AI infrastructure due to its first-mover advantage in liquid-cooled rack-level solutions.
The Smart Investor’s long-term thesis regarding SMCI’s immense long-term potential remains intact; we believe the current difficulties to be temporary. However, we are focusing on the company’s provision of clear communication about compliance questions, which we see as key to its ability to overcome negative sentiment weighing down the stock. Moving forward, Supermicro will complete a 10-for-1 stock split on October 1st; we will be zooming in on investor reaction to the split, watching for a possible positive sentiment infusion.
❖ Vertex (VRTX) remains under review following its underwhelming Q2 results, which included an EPS miss. The company reported a wider earnings-per-share loss than was expected. Notably, the negative EPS is a one-time event brought on by expenses associated with an acquisition of Alpine Immune Sciences, as well as increased investments to support launches of new therapies. The biopharma giant raised its full-year product revenue guidance, citing growth in sales of its cystic fibrosis (CF) treatment and the soon-to-launch gene therapy Casgevy. The stock fell from its all-time high following Q2 underperformance, though not by a large percentage. Vertex’s stellar finances and cash-producing capabilities, along with its strong portfolio of existing and prospective treatments, provide a strong argument in favor of the company. Meanwhile, the main factor against holding the stock, according to analysts, is VRTX’s high valuation, which could limit its near-term upside. We are waiting for news regarding the company’s trials on portfolio candidates, as well as investor sentiment trends, before taking further action.
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Portfolio Earnings and Dividend Calendar
❖ The Q2 2024 earnings season is officially over, with no Portfolio companies scheduled to release their results until mid-October.
❖ The ex-dividend date for GE Aerospace (GE) is September 26th.
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New Buy: Agilent Technologies (A)
Agilent Technologies, Inc. is an analytical instrumentation development and manufacturing company, which provides analytical instruments, software, services, consumables, applications, and expertise for laboratories, addressing the full range of scientific and laboratory management needs.
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Splitting Success
The company was established in 1999 as a spin-off of Hewlett-Packard Company, breaking records as the largest initial public offering (IPO) in Silicon Valley history at the time. At first, the company worked in multiple fields, focusing on key markets in communications, electronics, and life sciences. In 2014, businesses related to optical instruments, electronic measurement equipment, and lasers, were spun off to form Keysight Technologies.
Since then, Agilent continued to expand into pharmaceutical, diagnostics, clinical, academia, and government research markets. Agilent has established itself as a key player in the industry, offering a diverse portfolio of products and solutions for a variety of scientific and research fields. Today, the company is a global leader in life sciences, diagnostics, and applied chemical markets worldwide. Its total available market (TAM) value is estimated at almost $70 billion.
Agilent boasts a market cap of over $40 billion, more than $10 billion larger than its former parent, and annual revenues of $6.83 billion. The company has reached its size and market position through heavy investment in R&D, as well as multiple strategic acquisitions globally. In the past decade, it acquired 35 companies, including one in 2023 and two in 2024.
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Focused and Diversified
Agilent focuses its expertise on six key areas: food safety and quality testing, environmental (toxicology) and forensics, pharmaceutical solutions, diagnostics, chemicals and advanced materials, and research. These and additional spheres of Agilent’s expertise are broadly divided into three reporting segments: Life Sciences and Applied Markets, responsible for over 56% of total annual revenue; Diagnostics and Genomics Group, providing about 21% of revenue; and Agilent CrossLab Group, responsible for 23% of total revenue.
The company’s revenue streams are highly diversified by end market, with ~35% of top-line income stemming from the Pharmaceutical and Biopharmaceutical market, 23% from Chemicals and Advanced Materials, 14% from Diagnostics and Clinical, 10% from Environmental and Forensics, and ~18% from other markets. In addition, the company serves geographically diverse markets, with about 40% of revenues arriving from the Americas, 34% from APAC, and 26% from Europe and the U.K. Agilent serves public, private, and government customers in 110 countries around the globe.
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Fundamentally Stellar
Despite multiple acquisitions and global expansion, Agilent boasts excellent financial health. It has a low net debt-to-equity ratio of 19%, with debt well-covered by operating cash flow and interest obligations covered by EBIT many times over. It carries investment-grade ratings of “BBB+” at Fitch and Standard & Poor’s, and “Baa1” at Moody’s.
According to Fitch, these ratings “reflect the company’s strong positions across end markets, measured approach to capital deployment, and robust FCF profile.” While the current operating environment is challenging due to macroeconomic uncertainties driving down capex, Fitch expects Agilent “to mitigate the potential impacts on its business and financial profiles through continued operational excellence and a disciplined approach to balance sheet management.”
In addition, the company’s strength is displayed in its high ROE, ROA, and ROIC, placing it in the top 10% of its industry. Its operating and FCF margins also come in the top 10%, while its net profit margin makes the top 5%.
The life sciences and diagnostics industry is highly competitive and capital intensive, which means that firms operating in the sphere undergo constant consolidation processes through M&A. While Agilent is smaller than some of its main competitors such as Thermo Fisher and Danaher, its stellar finances and operational prowess support its bid to grow market share through acquisitions and R&D investment, while maintaining low leverage.
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Expected Growth Acceleration
Agilent’s leading positions in its largest end markets, solid operations, strong cash flows, and resilience supported by diversification have helped it overcome macroeconomic headwinds and are expected to support the company further. Thus, in the past year, it has grown its net earnings by almost 25%, while its peers in the industry saw an average earnings decline of over 10%. In addition, Agilent’s strong market position, coupled with high switching costs for customers, allows for pricing power and margin preservation even in a challenging revenue environment.
Though the company experienced relatively stagnant revenue growth over the past several years, it nonetheless managed to achieve significant earnings growth and margin expansion. This was achieved through operational efficiency improvement, cost reduction, focus on high-margin segments, digital advancements, and strategic acquisitions in adjacent spaces that helped maintain its competitive position and improve overall profitability. In addition, approximately 60% of Agilent’s revenue is recurring in nature, with these high-margin, stable revenue streams contributing to improved profitability.
Agilent reported its fiscal Q3 2024 results on August 21st, exceeding analysts’ revenue and earnings expectations. In fact, the company has never registered a single miss in its quarterly EPS reporting history. For the full fiscal year 2024, Agilent expects a relatively flat to slightly positive earnings growth as compared to the previous year. This is due to customers continuing to demonstrate cautiousness on capital equipment spending, while overall demand from China remains weak.
Still, the company raised its FY24 guidance, reflecting confidence in its ability to withstand economic challenges. In addition, lower interest rates and more predictable macroeconomic conditions support an outlook for improved performance in the latter part of the next 12 months and beyond.
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Total Return in Focus
Agilent Technologies’ stock has risen by 27% in the past 12 months, underperforming the S&P 500 but outperforming all of its main U.S. and global competitors. However, the stock still carries a notable discount to the Health Care sector and the Life Sciences industry averages, as well as to its long-term valuation history. Meanwhile, Agilent’s current and forward PEs come at the bottom of the valuation range of its U.S. peers.
In addition to the stock-price appreciation, Agilent rewards its investors through dividends and buybacks. The company has been paying and growing its dividends since 2012, with its current dividend yield reaching 0.67%. Although it may seem low, the yield is higher than that of its American dividend-paying peers from the industry. Given Agilent’s financial strength, it is expected to continue raising dividends for years to come.
Moreover, Agilent rewards its shareholders through aggressive buybacks. On May 29th, 2024, Agilent announced a new share repurchase program authorizing the purchase of up to $2 billion worth of its common stock. The company has been actively repurchasing shares in the previous quarters, including $585 million of buybacks in FQ3 alone. Agilent said it expects to spend about $250 million on share repurchases in FQ4. The company’s management said that the buybacks are a key element of their balanced capital deployment strategy, which aims to drive growth and deliver strong returns for shareholders.
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Investing Takeaway
Agilent Technologies, Inc. has a leading market position in its key end markets, benefiting from a sticky customer base, diversified revenue streams, and recurring revenues. Its focus on operational efficiency and strategic acquisitions has led to consistent margin expansion and earnings growth, even in challenging market conditions. The company’s investment in innovation and strategic M&A positions it well for future growth. With a robust financial position, ongoing share repurchases, and exposure to secular growth trends in healthcare and scientific research, Agilent offers a balanced mix of stability and growth potential for investors. Therefore, we view Agilent as a compelling opportunity for long-term investors and a valuable addition to the Smart Investor Portfolio.
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New Sell: Regeneron (REGN)
Regeneron Pharmaceuticals, Inc. is a New York-based biotechnology company that develops and commercializes medicines for the treatment of serious medical conditions, such as cancer, allergic and inflammatory diseases, eye diseases, and others. REGN is best known for its EYLEA injection, treating blindness in elderly patients. The exclusive patent on the drug expired in May 2024, but it remains the company’s “cash cow,” with annual global sales nearing $10 billion and U.S. sales of almost $6 billion in 2023.
After the patent expiration, several companies have received FDA approvals for biosimilar Eylea versions. The biggest threat to Regeneron’s revenue from eye drug sales is now posed by Amgen (AMGN), one of the world’s leading biotechnology companies, which had its Eylea-biosimilar Pavblu approved by the FDA shortly after the patent’s expiration. On Monday, REGN’s stock tumbled as a Federal Court ruling dismissed the request for a preliminary injunction of Regeneron Pharmaceuticals (REGN) against Amgen, which attempted to prevent the latter from launching Pavblu.
The rejection means that Amgen can launch Pavblu (the biosimilar version of Eylea) at risk, while it continues to battle appeals in court. While the launch at risk is not a certainty, according to analysts, deep-pocketed Amgen is known to have launched biosimilar products at risk in the past. The appeals decision is not expected to come before 2026. Regeneron has sued several other competitors over their proposed Eylea biosimilars; the latest court decision sends a negative signal regarding REGN’s attempts to block generic copies of the drug.
Some analysts, including BMO Capital, RBC Capital, and Wells Fargo, view these developments as a temporary headwind, with a decline in Eylea revenues long factored in the stock price, saying that these hurdles would be outweighed by the company’s resilience and innovative approach. On the other hand, Bank of America Securities issued a “Sell” rating on concerns about the evolving competitive landscape, including treatment areas outside of Eylea such as advanced non-small cell lung cancer.
Regeneron’s stock had been under review for possible deletion from the Smart Portfolio before the court’s decision, as we evaluated REGN’s strong portfolio and promising pipeline against the stock’s apparent overvaluation which limited a potential upside. Although REGN fell by about 9% from its August high, its current valuation would still require far faster earnings growth than the company has displayed in recent quarters. Against this backdrop, the dismissal of the preliminary injunction claim adds to REGN’s risk factors in the near term.
Wall Street top analysts attach an average upside of just ~6% for its stock in the next 12 months, with BofA penciling in a risk of an over 26% drop in its price. While Regeneron’s long-term prospects are robust, the current risk/reward picture doesn’t justify retaining the stock in the Smart Investor Portfolio.
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Smart Investor’s Winners Club
The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.
Our list of Winners has expanded to 17, as last week’s runner-up Pentair has inched up past the 30% threshold. The Club stocks are now GE, AVGO, ANET, EME, ORCL, TSM, SMCI, TPL, PH, CHKP, HWM, GD, APH, ITT, AMAT, VRTX, and PNR.
The next in line to enter the lucrative club is now PYPL with a 23.51% gain since its purchase on April 17th. Will it close the gap, or will someone else outrun it to the finish line?
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
