Thermo Fisher: Blue Chip Stock Melded With Growth Characteristics

Summary:

• Thermo Fisher Scientific reported $44.98 billion revenue in 2022 with a breakup of 29% for life science solutions and 47% for laboratory products and biopharma services among others.
• These revenue figures were 15% higher than the previous year, and almost a 50% rise in a five-year span.
• The company may be considered a blue chip one, but still shows a lot of signs of being a growth stock.
• For investors with a short-term horizon, it may be overvalued. However, it appears well priced for long term investors and even those with medium-term investment strategies.

Thermo Fisher Scientific Inc. (NYSE:TMO) is a supplier of scientific equipment, reagents and software worldwide. It is based in Waltham, Massachusetts and formed through the merging of Thermo Electron and Fisher Scientific in 2006. Throughout the years, Thermo Fisher Scientific has ventured on to acquiring other similar service providers such as Life Technologies Corporation, Alfa Aesar, Affymetrix, PPD and many more.

Ask anyone in a research facility about the brands of equipment they use, and undoubtedly you will hear the name Thermo Fisher Scientific. With the Covid 19 pandemic, the name rose to greater heights, where almost everyone used at least a test kit from this giant in the instruments world, and hence we see Thermo Fisher Scientific as a forerunner in scientific devices.

Thermo Fisher Scientific has rallied more than 10% month-to-date, beating the S&P 500 index’s total return in doing so. This may be a good stock, and it is not just over this short time frame.

There are some important data we are going to explore in this article. The recent rally definitely has legs in it, in our view. Long-term, this proves to be an excellent stock to watch and buy at the right prices.

Momentum in Financials

In 2022, Thermo Fisher Scientific grew revenue by 15 percent to $44.92 billion. In addition, earnings results were robust with GAAP diluted earnings per share (EPS) of $17.63 and adjusted EPS of $23.24. Free cash flow was strong as well coming to $6.94 billion.

Higher sales in the pharma service business increased organic revenues in the third quarter of 2023. Electron microscopy, chromatography and mass spectrometry businesses delivered strong growth. Productivity improvements, robust volume pull-through and sharp pricing which addressed higher inflation helped the positive results.

The life sciences segment was one of the primary contributors to the top line.

For 2022, it pulled $9.15 billion in OCF and collected $2.08 billion in free cash flow for Q3.

The focus on high-impact, innovative new products have paid off. An estimated $1.5 billion has been spent on R&D. The Orbitrap portfolio is regarded as industry-leading and with the launch of the Orbitrap Ascend Tribrid mass spectrometer there is a good chance for more advancements in proteomics, metabolomics and cancer biomarker research.

While these figures are pleasing, there isn’t anything that knocks it out of the park in terms of recent performance. Still, it is a premium stock going by the numbers alone and the past performance has us very excited. A browse-through of Leo Nelissen’s research reveals that the last decade has been wonderful for the healthcare supplier. We wish to restate that revenues have soared 240% in a 10-year period with net income growing an astounding 360%. When looking at the 10-year chart on Seeking Alpha, the stock price has gone up by 378%. This is more than twice the S&P 500’s 10-year return and almost four times the index’s long-term average.

Opportunities Exist Beyond the Pandemic

Thermos Fisher Scientific reaped the highest benefits through the Covid 19 pandemic, where an opportunity arose for the company to increase its profits by being the biggest supplier in PCR kits, vaccines, PPE, ventilator components and hand sanitizer. This resulted in the company increasing its revenue in 2021 by more than 22% in comparison to the previous year to a whopping $39.2 billion. Even with the decline in Covid cases and settlement of the pandemic, the revenue of the company has been on the rise. As we mentioned earlier, in 2022 the revenue reported was over $40 billion.

TMO is a company that thrived well due to the Covid 19 pandemic amidst the backdrop of other firms hitting the danger zone. What people wonder now is how long it can sustain that high. The company is now making significant investments in non-covid related matters, according to CEO Marc Casper, and this is exactly what investors wish to hear.

“When I think about post pandemic … one of the things we said back a year ago is that we’d manage the company in such a way in that we’d exit the pandemic with a meaningfully stronger industry leadership then when we went in and obviously, we went in with a very strong position. And if I think about the actions we’ve taken, we’ve accelerated our investments in operating expenses, R&D, and capital expenditures to be a faster growing company organically exiting the pandemic.”

Innovation, Capex Positives and Talent are Central Themes

While 2022 was a spectacular year for innovation, there are lots of breakthrough products that will be launched in 2023 and beyond.

TMO has a total of 9725 global patents. In comparison, Samsung electronics which has the most patents has a total of 352342 patents globally. Thermo Fisher Scientific consistently ranks in the top 200 of patents awarded each year.

There has been plenty of research arguing for the benefits of innovation. Stock prices tend to rise with innovative strategies being employed by firms. Earnings are improved and these translate to bigger stock price gains. Innovation in medical devices is critical so it is nice to see that this stock is performing well on this front.

Recently, TMO had been recognized by the R&D 100 Awards for its innovations. Consequently, the $1.5 billion invested in research and development is accelerating innovation and providing quality products.

The company is expanding in China and East Asia with the opening of a manufacturing center in Hangzhou, China and a Bioprocess Supply Center in Incheon, South Korea. With all of these developments, growth appears inevitable well into the future.

Thermo Fisher Scientific is investing quite heavily with manufacturing facilities springing up all across the United States.

Thermo Fisher has been a top company to work for and this enables it to attract the talent it requires, advancing on Fortune’s list of the World’s Most Admired Companies. This insinuates that they are doing something right when it comes to managing talent.

Viability

We are not exactly all that conversant with medical breakthroughs, but from the looks of it these are targeting the needs of the times. Alzheimer’s, Huntington’s and cancer are some of the debilitating disorders that could be treated with the discovery of new drugs through the efforts of TMO.

In 2020, over 5.8 million Americans were living with Alzheimer’s disease. Given the increase expected in the elderly population in the U.S. and abroad, any new drugs in this area will be welcomed with enthusiasm. In fact, there is a tripling of the current Alzheimer’s population being projected by the CDC by 2060. Across the globe, there may be more dire disease accelerations.

Risks

As part of the Q3 earnings release, management downgraded full-year revenue guidance to $42.7 billion citing the current macroeconomic environment.

The EV/EBITDA which clocks in at 20.08 is on the high side. Danaher Corporation (NYSE:DHR) has the same ratio at 16.95 and Johnson & Johnson (NYSE: JNJ) is a 14.05 value. Yet, West Pharmaceutical Services, Inc (NYSE: WST) comes in at 30.64. Meanwhile, the healthcare sector EV/EBITDA stands at 14.22, while the industry itself has an average value of 14.39.

Thermo Fisher’s businesses consist of export and import activities. As a result, the firm has comply with laws enforced by the U.S. Departments of State, Commerce and Treasury. The reliance on logistics means that rules put in place by the Department of Transportation, the Federal Aviation Administration and related foreign agencies must be adhered to.

The exposure to China is an additional risk. There has been negative growth in the company’s Chinese business as indicated by Lighting Rock Research. China is an important economy because 10 percent of TMO’s revenues have historically come from the country. The Chinese economy is sluggish and most research points to the headwinds persisting in the near-to-mid term.

The organization proudly reports that no laws and regulations have been breached to date. Yet, one must be wary that the financial condition of the company could take an adverse turn if any issues crop up in the future.

Valuation

Doing valuations can be rather tricky. I happen to chance upon Robert F. Abbott’s take on this process and thought I’d reproduce here with the modified data reflecting TMO’s case. Here it goes.

The chart below exhibits consensus earnings per share forecasts for Thermo Fisher Scientific:

Last year’s estimate comes from 23 analysts, the 2024 approximation from 24 analysts, and 4 analysts for 2026 and 2027.

The estimates suggest that EPS will climb from $21.58 for 2023 to $31.18 for 2028. That’s a 45% increase over five years, or an average of 8.9% yearly. The figure is conservative in comparison to its earnings growth over the past decade.

Since the share price has a history of following net income, then we would argue that a 45% increase in earnings would suggest a 45% increase in the share price over five years. That would take the price from $544.32 (at the close on January 12) to $833.63 in five years.

That’s quite an optimistic forecast for a stock that’s been given an F grade by the Seeking Alpha platform. The elements of the grade consist of:

P/E Non-GAAP FWD: 25.67 vs. the Healthcare sector median of 18.58.

PEG NON-GAAP FWD: 2.74 vs. 2.18 for the sector.

EV/EBIDTA FWD: 22.24 vs. 13.50 for the sector.

Price/Sales FWD: 4.93 vs. 4.04 for the sector.

The components also include an F for the low dividend yield, of 0.26%. Turning to other ratings, Quants give Thermo a Hold rating, while a Seeking Alpha analyst gave it a Buy, and Wall Street analysts rate it a Buy as well. Even with the rating positives, one could surmise that this stock is expensive at the moment.

It is all about your investment horizon. Shares are fairly valued over the medium-to-long term. In the near-term, it is tough to justify buying the stock. On the other hand, with the chance that the stock may appreciate greatly five years from now, it may be a sweet bargain.

As with any biopharma stock, innovation is a central theme. We are optimistic on the company’s earnings forecasts given the drivers and we will go with a rather high revenue growth over the next decade. There is a continuous flow of innovative products and many in the pipeline, boosting our revenue estimates even further.

Conclusion

The company is also well backed up by the market, with institutions actively buying the stock. Marketbeat has it that analysts have rated the stock at buy going forward, with the price target being consistently upgraded.

The continuing investments that Thermo Fisher Scientific may make in the coming future will further accelerate growth of the company and add value to shareholders. Shareholders got $3.5 billion of stock buybacks and dividends. Overall, we are pleased with the performance of the industry. This is a blue chip stock with vast growth potential as demonstrated in its financials.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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