Thermo Fisher Good and Getting Better

 | Oct 01, 2013 | 9:00 AM EDT
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Just over a year ago, (Sept. 4, 2012) we recommended Thermo Fisher Scientific (TMO), when its shares were trading around $57.35.

Our thesis then was that Thermo Fisher was a stable growth stock trading at a value price. The company was trading at a significant discount to its Life Sciences peer group despite its superior historic and projected earnings growth. We wrote that earnings could reach $7.50 to $8.75 by 2016.

Fast forward to today; with the stock 60% higher at $92.50, we are still recommending this outstanding company.  Here's why:

  1. TMO has met or exceeded all of its financial targets; with the pending acquisition of Life Technologies expected to close in early 2014, it should reach the $7.50 to $8.75 earnings range way before 2016. The Life acquisition is expected to be 15% accretive, adding 90 cens to $1.00 in per share earnings during its first full year, through a combination of cost savings (purchasing efficiencies and combined infrastructure) and revenue growth. Revenue growth should be driven by better distribution of Life's products through Thermo Fisher's network and, reciprocally, TMO taking advantage of Life's online sales capabilities.
  2. At TMO's investor day on May 22, the company reaffirmed its secular growth targets and outlined the path to achieving them. During the past five years, through 2012, Fisher Scientific had 6% top line growth and mid-teens earnings per share growth. It also expanded its margins by 50 to 100 basis points per year. At an industry conference earlier this month, CEO Marc Caspar said that he thought the company had the ability to raise its margins from 19.5% today to the mid-twenties over the next five years.
  3. Earnings continue to meet expectations in spite of the headwinds created by government sequestration and "pretty weak industrial markets" (about 30% of the business). On the most recent earnings call the company slightly raised the low end of its earnings guidance despite absorbing an additional three cents of headwind from adverse foreign exchange.
  4. Areas of earnings strength included biomarker tests and clinical diagnostic offerings. Pharma clinical trials and Biotech markets remain strong, growing in the high single digit range; the company believes it is gaining market share in these areas. China remains a key growth area for the company, showing 20% plus organic growth for the eighth quarter in a row. Thermo Fisher'ss products and service offerings are aligned with China's Five Year Plan and its pressing needs in healthcare, the environment and food safety. Emerging markets represented 10% of Thermo Fisher's revenue in 2007 and 21% in 2012. The company's goal is for emerging markets to grow modestly and represent 25% of revenue by 2017.  

To sum up, TMO continues to deliver consistent growth despite the macro headwinds of government sequestration and depressed Industrial markets (down low single digits). About two-thirds of its business is recurring from consumables and services. Europe is improving, Asia continues to grow and the company is about to close on a highly accretive acquisition. Finally, at some point the headwinds of sequestration and depressed industrial markets will lift.

At 13 times 2014 pro-forma earnings we think the shares remain a solid investment. Our current target has been moved up to the $105 to $110 per share price range, as we look for the stock to trade at 14 times mid-2015 pro-forma estimated earnings.

So, as good as it has been for TMO shareholders during the past year, we think there is more gain to come.

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