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Morningstar | Agilent and Waters Remain the Only Wide Moats in the Life Sciences/Diagnostics Industry. See Updated Analyst Note from 19 Jul 2019

After taking a fresh look at top-tier analytical instrument providers Agilent and Waters, we maintained their wide moat ratings, which makes them unique in the life science and diagnostic industry. For comparison, most covered companies in this industry only earn narrow moat ratings. We think Agilent and Waters' heavy concentrations in very sticky end markets--such as biopharmaceuticals, chemicals, and energy--and the significant learning curve, reproducibility, and regulatory factors associated with their tools all contribute to wider moats than their peers.

Both firms enjoy exemplary stewardship ratings, as well. Specifically, their disciplined acquisition records in recent years contribute to returns on invested capital at more than double capital costs, which sets them apart in the industry and also helped them avoid less attractive areas within the industry. These capital allocation and business mix factors contribute to wide moats at Agilent and Waters compared with narrow moats at more acquisitive companies, such as Danaher and Thermo Fisher Scientific, that generate lower ROICs and operate with less attractive business mixes, in our opinion. Agilent and Waters also appear to operate with incentive structures that should align them with shareholders, which gives us confidence in future stewardship.

From a valuation perspective, Agilent's shares appear fairly valued while Waters' are moderately overvalued. Agilent's shares recently traded at a 6% premium to our $66 per share fair value estimate and roughly 23 times projected earnings. Waters shares recently traded at an 18% premium to our $182 per share fair value estimate and at roughly 24 times projected earnings. We assume both grow adjusted earnings per share 11% compounded annually during the next five years. However, Agilent has more organic growth prospects primarily through margin expansion while Waters will need to rely on share repurchases for more than half of its annualized bottom-line growth.