AGILENT TECHNOLOGIES INC. $30 (New York symbol A; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 346.0 million; Market cap: $10.4 billion; Price-to-sales ratio: 2.3; WSSF Rating: Average) makes testing systems that help improve the quality of electronic products, such as cellphones, set-top boxes and high-speed Internet equipment.

The company gets 50% of its revenue from these systems, which it sells to over 30,000 contract manufacturers, as well as research and development labs. It also provides associated services.

Agilent recently separated its circuit-board testing operations into a stand-alone division. This business, which accounts for about 5% of Agilent’s revenue, makes equipment that helps its customers find and repair defects in circuit boards.

Demand for electronic devices is highly cyclical. To generate steadier revenue and earnings, Agilent has expanded its Bio-Analytical Measurement division over the past few years. This business, which accounts for 45% of Agilent’s revenue, supplies measurement equipment to medical-research labs and drug developers.

Agilent’s revenue fell from $6.9 billion in 2005 to $5.0 billion in 2006, after it spun off Verigy as a separate company. (Agilent’s fiscal year ends on October 31). Revenue rose to $5.8 billion in 2008, but fell to $4.5 billion in 2009, mostly because electronics makers cut spending on testing equipment during the recession.

Despite the uneven revenue, Agilent’s earnings rose from $0.99 a share (or $494 million) in 2005 to $1.87 a share (or $693 million) in 2008. Earnings fell to $0.80 a share (or $280 million) in 2009.

Agilent spends around 14% of its revenue on research, so it is more profitable that it appears. This spending helps it dominate its niche markets, and develop new products.

For example, the company is working on systems and software that can more accurately analyze DNA. This could lead to new treatments for genetic disorders, like Down’s syndrome and cystic fibrosis.

Big savings on the way

Agilent is restructuring its operations in response to the slowing revenue. This mainly includes cutting 3,800 jobs, or roughly 20% of its employees, and closing some plants. Most of the layoffs were in electronic testing. These moves should lower its annual expenses by $525 million by mid-2010.

The savings from these cuts will free up cash for a major acquisition: Agilent is paying $1.5 billion for California-based Varian Inc. (Nasdaq symbol VARI).

Varian makes a wide range of drug-testing equipment, such as mass spectrometers that detect and measure substances in blood and other patient samples. It also makes vacuum pumps and equipment that help keep labs clean.

Varian’s customers must buy supplies, such as filters, for their products. These supplies generate steady revenue and earnings streams for Varian. In contrast, Agilent sells systems that don’t require supplies.

The purchase should close early next year. Excluding one-time costs, Agilent expects Varian to add to its earnings in the first year following the purchase. As well, Agilent expects to save $75 million a year, mostly by merging facilities.

Debt still low despite acquisition

Agilent issued $750 million of new senior notes to help pay for Varian. This raised its long-term debt to $2.9 billion as of October 31, 2009, from $2.1 billion a year earlier. Despite the rise, Agilent’s long-term debt is still just 28% of its market cap. The company now holds cash of $2.5 billion, or $7.21 a share.

Agilent will probably earn $1.44 a share in fiscal 2010. The stock trades at 20.8 times that estimate. That’s still an attractive p/e ratio in light of its high research spending and improving prospects for future earnings growth.

Agilent is a buy.