Morningstar | We Think Waters and Agilent Both Deserve Wide Moats, but Look Fairly Valued
We’re updating our moat ratings and fair value estimates for Agilent and Waters. While we’re slightly lowering our fair value estimate for Waters to $179 per share following modestly disappointing results over the last few quarters, we continue to have a favorable outlook for the company’s wide moat. Meanwhile, we’re upgrading Agilent’s moat to wide based on the firm’s nearly equal in size liquid chromatography business as well as its leadership in gas chromatography. We’ve slightly bumped up Agilent’s fair value estimate to $59 based on extending the second stage of our model on the moat change. The new fair value estimates reflect an implied 22 times forward adjusted earnings multiple for both companies. While both companies look about fairly valued at current market prices, we think its worth investors keeping these names on their radar.Thanks to sophisticated analytical requirements and customer switching costs, we feel both Waters' and Agilent's innovation and disciplined capital allocation strategies deserve wide moats. Agilent leads the GC market--which doesn't share quite as high of switching costs as the LC market--but also comes in a close second place behind Waters in LC.
We expect Waters and Agilent can sustain returns on capital near 34% and 18% on average, respectively, over the long term. While the chromatography and mass spec market is a fairly mature industry, we forecast slightly higher growth of 7% and adjusted operating margin expansion up to 26% for Agilent as the company continues to benefit from new product launches (like Intuvo GC and Ultivo LC-MS) and its exposure to the higher growth diagnostics market combined with manufacturing efficiency efforts. Meanwhile, we forecast near 5% growth for Waters as new products, like the expected launch of BioTOF in 2019, help refresh the portfolio. We see Waters’ adjusted operating margin remaining relatively unchanged near 30%.
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.
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.
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