Thermo Fisher Scientific (TMO)

October 4, 2018

COMPANY DESCRIPTION

Thermo Fisher Scientific (TMO) consists of three business units: Analytical Technologies, Specialty Diagnostics, and Laboratory Products and Services.

INVESTMENT THESIS

Our BUY rating and $269 price target are based on several factors. First, TMO is an industry leader in nearly every product category and research labs worldwide order from the company’s product catalog. Thermo Fisher Scientifics’s total addressable market (TAM) is above $100 billion. Second, with revenue soon to surpass the $25 billion mark, the company has become the largest supplier of research instruments and consumables.  Thirdly, in addition to being a savvy acquirer, Thermo Fisher Scientific invests heavily in such technologies as mass spectrometry. Lastly, TMO’s emerging markets business is impressive and has grown to 20% of revenue.

The company has increased its manufacturing operations in these markets, enabling it to compete effectively with existing manufacturers. Thermo Fisher Scientific’s strong brand provides it access to researchers in emerging markets. In view of emerging markets governments in this region’s emphasis on life sciences research, the company should be easily able to achieve its goal of 8%-10% annual growth in emerging markets.

RECENT DEVELOPMENTS

On August 2, TMO reported better-than-expected second-quarter results. Adjusted earnings rose to $2.75 from $2.29 in the prior year period and above the consensus estimate of $2.62. Second-quarter revenue of $6.1 billion rose 22% and surpassed the consensus estimate of $5.9 billion. Organic revenue in the second quarter grew 10%, while acquisitions added 12% to revenue. Foreign currency was a 200 basis-point tailwind.

EARNINGS & GROWTH ANALYSIS

Reflecting solid first-half results and foreign-exchange tailwinds, Thermo Fisher Scientific raised its revenue and earnings guidance. Revenues are expected to come in between $23.7 billion and $23.9 billion, up from a prior $23.6-$23.9 billion. Prior to the earnings announcement, the consensus estimate had called for revenue just below $23.8 billion.

Adjusted earnings are now projected to come in between $10.89 and $11.01 billion, compared to $10.80-$10.96 per share previously. The consensus estimate had called for adjusted earnings of $10.90 per share, near the middle of management’s projected range.  Our 2019 adjusted earnings estimate is $11.25, rising to $12.30 per share in 2019.

RISKS

Thermo Fisher Scientific is vulnerable to a decline in global industrial demand, more so than other life science tool companies with little or no industrial exposure. TMO could fail to reach its revenue and cost synergy targets for the LIFE acquisitions. Demand among academic institutions could be weaker than expected, despite increases in the National Institutes of Health’s budget. Technology is ever-changing and the company’s inability to introduce new products and services could harm results.
VALUATION

Our $300 price target is 24.4 times our 2019 earnings forecast, above the peer average of 22 owing to TMO’s strong market position, long operating history and the consistency of its consumables business. Prospects for improvement in the company’s organic revenue growth also justify a premium. Our target price, if achieved, offers investors the prospect of a 21% total return.

 

Thermo Fisher Scientific (TMO)

Current Price: $247.29

Target Price: $300

Current Valuation: 20.1 times FY19 EPS

Target Valuation: 24.4 times FY19 EPS