AGILENT TECHNOLOGIES INC. $44 (New York symbol A; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 345.1 million; Market cap: $15.2 billion; Price-to-sales ratio: 2.6; No dividends paid; TSINetwork Rating: Average; www.agilent.com) makes testing systems that help improve electronic products, such as cellphones and computer-networking equipment.

Agilent was a unit of Hewlett-Packard Co. until 1999, when Hewlett spun it off as a separate company.

The company has gone through a lot of changes since. In 2005, it sold its struggling chip-making operations. In 2006, it spun off Verigy Ltd., its computer-chip-testing business. Agilent has also aggressively cut its costs in the past few years, mainly by closing plants and cutting jobs.

The company’s sales rose 16.1%, from $5.0 billion in 2006 to $5.8 billion in 2008 (fiscal years end October 31). The recession cut electronics demand, and many of Agilent’s customers bought less testing equipment in response. As a result, the company’s sales dropped 22.4% in 2009, to $4.5 billion.

Agilent’s earnings rose 32.0%, from $525 million in 2006 to $693 million in 2008. These figures exclude restructuring costs, such as severance payments. Earnings per share jumped 55.8%, from $1.20 to $1.87, on fewer shares outstanding. However, the company lost $31 million, or $0.09 a share, in 2009.

Medical products dilute Agilent’s risk

Demand for electronic devices is highly cyclical. To cut its dependence on this industry, Agilent bought Varian Inc. for $1.5 billion in May 2010.

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

Varian’s customers must also buy supplies, such as filters, for their products. These supplies generate steady revenue streams. Services and supplies now account for around 20% of Agilent’s total sales.

Following the Varian purchase, Agilent reorganized its operations into three divisions: Electronic Measurement (51% of 2010 sales, 47% of earnings); Life Sciences (27%, 24%); and Chemical Analysis (22%, 29%).

Varian fuels big gains in sales, orders

Thanks mainly to the addition of Varian, Agilent’s sales rose 21.5% in fiscal 2010, to $5.4 billion from $4.5 billion in fiscal 2009. Earnings recovered to $624 million, or $1.77 a share. Agilent also won $5.7 billion of equipment orders. That’s up 28.0% from $4.5 billion in fiscal 2009.

Agilent expects the Varian purchase to eventually save it $100 million a year, mostly by merging facilities. It should realize half of this target in fiscal 2011.

The company had to borrow most of the cash it needed to pay for Varian. That increased its long-term debt to $2.1 billion from $1.5 billion. Still, that’s a low 14% of its market cap. Goodwill and other intangible assets of $1.9 billion are also a reasonable 24% of its total assets.

Moreover, Agilent holds cash of $2.6 billion, or $7.65 a share. That gives the company plenty of room to make more acquisitions.

For example, in February 2011, it paid an undisclosed sum for privately held A2 Technologies. This company makes in-lab and portable spectrometers than analyze soil, rock, plastics and other substances. A2’s products greatly improve the prospects of Agilent’s Chemical Analysis division.

The company also plans to increase its research spending. In 2010, it spent $612 million (or 11.2% of its sales) on developing new products. That’s down 4.7% from $642 million (or 14.3% of sales) in 2009.

Higher research costs will depress Agilent’s earnings, at least in the short term. However, new products from this spending should help fuel its growth for years to come.

Growing with smartphones & tablets

The company is now working on products that test devices designed for new, high-speed wireless networks, such as smartphones and tablet computers.

Agilent is seeing particularly strong demand for its products in Asia. That’s because countries like China and India are increasing the speed and capacity of their wireless networks. The company is also seeing strong demand for products that test food for possible contaminants, such as pesticides and chemicals.

New products will also let Agilent keep increasing its overseas sales. It now gets 68% of its sales from outside the U.S. The company uses hedging contracts to cut its exposure to volatile exchange rates. Thanks to these contracts, Agilent now receives U.S. dollars for over 60% of its sales.

The stock has gained 25% since the Varian purchase. It now trades at 16.7 times the $2.64 a share that Agilent will probably earn in 2011. That’s a low p/e ratio in light of its high research spending and large international reach.

Agilent is a buy.