It's not often that you have the chance to buy a stable growth stock at a value price, but you do today with Thermo Fisher Scientific (TMO). Thermo Fisher is a healthcare and life-sciences company that has had a steady and growing stream of profits from its large consumables and services businesses, which comprise two-thirds of its annual revenue. The rest of its sales come from a premier instruments business that stands to benefit from an economic upturn.
Unlike some of its competitors, Thermo Fisher has reported solid results in 2012 despite the challenging economy. In its recent second-quarter earnings report, it exceeded analysts' revenue and profit estimates, and raised its full-year earnings guidance to a range of $4.74 to $4.84 per share.
At the current share price of $57.35, it sports a price-to-earnings ratio of 12x on 2012 estimated earnings and less than 11x on 2013 estimates. Considering that the company has grown its revenue by 6% and earnings by 17% over the past five years, that valuation strikes us as compelling.
At its recent investor day, management detailed a base case financial outlook for the next five years that includes the following.
- Mid-single digit annual organic growth
- 50 to 100 basis points of margin expansion each year
- Low to mid-teens annual earnings per share growth
If the outlook holds true, this would translate into 2016 earnings per share in the range of $7.50 to $8.75.
The company is gaining market share from its competitors. It's significantly increasing its emerging markets business, which generated 19% of revenue last year, with a target of 25% by 2016. It's also benefiting from exposure to secular growth areas within healthcare and environmental safety. Within emerging markets, a key area of growth is China, where healthcare is a focus of China's new five-year plan.
Operationally, the company is very well managed. Margins are expected to improve thanks to facilities' rationalization, as well as low-cost global manufacturing. Capital allocation has been impressive.
Furthermore, management has used Thermo Fisher's impressive annual free cash flow of $1 billion to $1.5 billion over the past five years to make accretive acquisitions, to repurchase shares and to initiate a dividend in 2012. The company has a very strong balance sheet with a debt/capital ratio of 31% at June 30.
Nevertheless, even with all these attractive absolute and relative metrics, the shares are trading at a significant P/E discount to its life sciences peers.
It is not a stretch to envision Thermo Fisher shares trading at a low to mid-teen multiple of earnings, with a resulting target price of $75. In our view, this is the great opportunity, and we don't think it wil last indefinitely.