A Life Science Tools And Diagnostics Pair Trade: Goldman Recommends Buying Agilent, Moving to Sidelines On Thermo Fisher

Goldman Sachs has a pair trade in the life sciences tools and diagnostics space ahead of third-quarter earnings season. 

The Analyst

Analyst Patrick Donnelly maintained a Buy rating on Agilent Technologies Inc A and increased the price target from $77 to $82.

The analyst added Agilent to Goldman's Americas Conviction List and also named it as a top pick.

At the same time, Donnelly downgraded shares of Thermo Fisher Scientific Inc. TMO from Buy to Neutral and maintained a $250 price target.

The analyst removed the stock from the Americas Conviction List.

The Thesis

Both Agilent and Thermo Fisher have sound fundamentals and are poised for "beat-and-raises" over the next several quarters, Donnelly said in a Monday note. (See his track record here.) 

Donnelly said he prefers Agilent's setup and views Thermo Fisher's growth acceleration and margin expansion as being priced into the stock. 

Agilent: A Premium Growth Story In Tools

Agilent is a premium growth story in tools on the basis of its ability to accelerate organic growth heading into 2019 despite concerns about China trade headwinds, Donnelly said. China accounts for about 20 percent of the company's revenues, he said. 

Agilent has a clean path to growth in the fourth quarter and in 2019 amid support from "continued momentum in CrossLab, Intuvo/Ultivo product cycle ramps, a rebound in China food and environmental orders and the expansion of the Oligo facility," the analyst said. 

Intuvo and Ultivo should be key drivers over the next 12-24 months, with the former expected to make meaningful contributions in 2019, potentially adding about 1 percent to organic growth in 2019 and 2020, Donnelly said. 

"We continue to see valuation for Agilent as undemanding and see upside for multiple expansion as investors turn to the layering of organic growth drivers." 

Thermo Fisher's Setup Becomes More Demanding  

There is limited upside to Goldman's price target for the shares of Thermo Fisher, as the stock's valuation already reflects the prospects for organic growth acceleration, Donnelly said.

"While we remain constructive on the fundamental story for TMO, we prefer to remain on the sidelines, as the setup over the next year gets more demanding driven by more normalized top-line impacts from FEI." 

The Price Action

Agilent shares were trading up 0.41 percent to $69.13 at the time of publication Monday, while Thermo Fisher was slipping 1.68 percent to $237.90. 

Related Links:

Becton Dickinson Positioned For Top-, Bottom-Line Outperformance, JPMorgan Says In Upgrade

Becton Dickinson Has A Strong, Diverse Pipeline, But Is Fairly Valued, Says BMO

Photo courtesy of Thermo Fisher.