Report
Julie Utterback
EUR 850.00 For Business Accounts Only

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.
Underlying
Waters Corporation

Waters is a holding company. Through its subsidiaries, the company is a specialty measurement company. The company primarily designs, manufactures, sells and services high performance liquid chromatography, ultra performance liquid chromatography and mass spectrometry technology systems and support products, including chromatography columns, other consumable products and post-warranty service plans. In addition, the company designs, manufactures, sells and services thermal analysis, rheometry and calorimetry instruments through its TA? product line. The company is also a developer and supplier of software-based products that interface with its instruments, as well as other manufacturers' instruments.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Julie Utterback

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