• Thermo Fisher’s stock is now a “buy” due to signs of recovery, including positive sales growth and stabilized margins, despite recent bearish trends.
• The company’s post-pandemic challenges are easing, with optimistic executive comments and improved guidance for 2024, indicating a potential return to organic growth.
• Potential deregulation under Trump’s administration could benefit Thermo Fisher by increasing demand for its equipment and consumables in a more competitive pharmaceutical market.
• Valuation based on free cash flow conversion suggests a fair value of $526, making Thermo Fisher a conservative, low-risk investment with expected returns of 9-10%.

Introduction

I have already written two articles about Thermo Fisher (NYSE:TMO), one of my favorite companies in the healthcare sector. I recommend you take a look at them if you want to fully understand my perspective on the company. In the first article, I explained my thesis and why I believe it is a superior business model within the industry. In the second article, I discussed how we were likely at the bottom of the cycle and how the company was positioning itself to return to growth in the upcoming quarters and years, in my opinion.

Currently, the stock has entered a bearish phase, especially since Donald Trump won the election a month and a half ago. I believe the market is misunderstanding the impact the new president will have on the industry, and I want to use this article to explain why. I will also review the last few quarters and the comments made by the executives in recent earnings calls. Finally, I will update my valuation model and explain why I am upgrading the rating of Thermo Fisher’s stock to a buy, after keeping it at hold for over a year and a half.

The cycle is turning around

As we already discussed in previous articles, Thermo Fisher and other companies in the healthcare sector, such as Danaher (NYSE:DHR) and Eurofins, found themselves navigating the post-COVID aftermath. During the pandemic, spending on diagnostics and vaccine research skyrocketed, and one of the main beneficiaries was Thermo Fisher, as its catalog of products and services aligned perfectly with market demands at that time. Revenues and profit margins surged well above the trend established over the previous decade, and, consequently, the stock price soared as well. However, the issue was that the market extrapolated this growth into the future, leading to inflated expectations. Once the pandemic subsided, much of that extraordinary spending disappeared, and both sales and margins contracted back to pre-pandemic trends.

However, I believe we already have enough signals to affirm with a certain degree of confidence that the bottom of the cycle is behind us and it is slowly starting to turn around.

• Last quarter was the first in nearly two years of positive sales growth for Thermo Fisher. A modest 0.25%, but nonetheless, it marks a return to growth.

• Thermo Fisher’s guidance for the full year forecasts sales growth of between 0-1%. Again, it’s almost negligible growth, but it seems to confirm that the cycle has bottomed out.

• The company’s margins already appear to have stabilized, with three consecutive quarters of recovery.

• The results from Danaher, its main competitor, are following a similar trend, although they remain slightly more delayed compared to Thermo Fisher.

• The executives’ comments are beginning to sound more optimistic regarding the coming quarters and years.

This last point seems particularly relevant to me because I noticed the most optimistic remarks of the past year and a half during the third-quarter earnings call. Some of the comments I found most interesting are as follows:

Mark Casper, the CEO, mentioned that 2025 will be the last year in which the headwinds from the pandemic will have a negative impact, and that in 2025, this impact will be much smaller than this year. With these remarks, we can infer that organic growth may return next year, thanks to the near disappearance of these headwinds.

“In 2025, what I would say is that it’s the final year of the runoff of the pandemic-related activity and while that’ll still be a headwind to growth, it’s going to be less than it was in 2024.”

This ties in with comments about the improvement in end markets throughout this year and the expectation of returning to organic growth as early as next quarter.

“The end markets are modestly improving throughout the year. We’re excited that in the fourth quarter, we’re going to return to growth organically.”

They are even starting to show greater optimism regarding China, although I prefer to remain cautious and not count on significant growth in this region for now.

“I came away from the visit, seeing firsthand how well-positioned we are to capitalize on the market opportunities when the economy picks up in China.”

Finally, they also express confidence in their organic growth and acquisition strategy, which is allowing them to gain market share.

“Our growth strategy is driving share gain. Our PPI Business System enables outstanding execution. We have a disciplined capital deployment strategy that generates returns. Our acquisitions are performing well. And we’re going to be well-positioned to deliver differentiated performance once again in 2025.”

In conclusion, I think we should take these words with caution and wait to confirm this change in trend, but I believe there are already enough signals to be optimistic about recovery in the coming quarters.

Q3 Earnings

If we take a look at the latest earnings presentation, we can see how these recovery signals we mentioned translate into numbers. Sales growth was 1%, with 0% coming from organic growth, 1% from acquisitions, and, as noted earlier, COVID-19-related sales had a 0% impact this quarter. As we discussed, the impact of pandemic-related sales has almost completely vanished, and next year it will be nonexistent. Therefore, everything will depend on the organic and inorganic growth of the business itself.

If we break it down by segments, we see that most show almost no growth, except for Life Sciences Solutions, which continues to face more significant challenges:

• Life Sciences Solutions: Declined by 6.4% compared to last year, representing 22.3% of sales.

• Analytical Instruments: Grew by 1% year-over-year, accounting for 16.8% of total sales.

• Specialty Diagnostics: Increased by 1.5% compared to the same quarter last year, making up 10.7% of sales.

• Laboratory Products and Biopharma Services: Declined by 0.6%, representing 54.7% of sales.

The company’s optimization efforts have paid off, as evidenced by the third consecutive quarter of improved margins. Operating income reached $1.84 billion, with an operating margin of 17.3% (vs. 17.6% in 2023), driven primarily by improved gross margin and restructuring carried out in previous quarters.

Thanks to the improved conditions in the sector and the operational efficiencies implemented, the company has slightly raised its guidance for 2024:

• Revenue: $42.4 to $43.3 billion

• EPS: $21.35 to $22.07, a slight increase from the previous range of $21.29 to $22.07.

The Republican Victory Benefits Thermo Fisher

An interesting point to discuss is the recent decline in Thermo Fisher’s stock price, as well as that of other companies in the sector, following Donald Trump’s victory. Some investors fear that the deregulation proposed by the new administration could negatively impact Thermo Fisher’s business. From my perspective, not only do I believe this won’t be the case, but it might actually benefit the company.

A broad deregulation could make patents obsolete and encourage greater competition among pharmaceutical companies for the development and commercialization of medicines. Let’s consider an extreme example—not something I think will actually happen, but it will help illustrate my point. Imagine Donald Trump cancels Novo Nordisk’s patent for Ozempic. This would obviously be terrible for Novo Nordisk, but it would be very beneficial for other pharmaceutical companies, which would now be able to market their own versions of the medication and compete in a market that was previously closed to them.

As I often point out, Thermo Fisher sells the “picks and shovels” of the pharmaceutical sector. When all these pharmaceutical companies start developing and researching their versions of Ozempic to bring them to market, they’ll need to purchase the necessary equipment and consumables to do so, directly benefiting Thermo Fisher.

Massive deregulation would eliminate efficiencies and economies of scale across the sector, leading to an increase in duplicated spending on machinery and consumables. Therefore, in my opinion, if this deregulation were to occur, Thermo Fisher and similar companies like Danaher could actually emerge as major beneficiaries, even though the market doesn’t currently perceive it that way.

As mentioned, the Ozempic example is simply meant to illustrate my perspective—by no means am I suggesting this specific scenario will happen. However, even a softening of certain regulations could result in similar effects on a smaller scale, potentially benefiting Thermo Fisher. In my view, the market is wrong to penalize Thermo Fisher for the Republican victory and fails to fully grasp the impact it could have on the healthcare sector.

Valuation and Conclusions

My valuation model hasn’t changed significantly because the company’s operational performance is in line with what I had expected in my previous articles. However, I’ve made an important change in how I value the company. In my earlier articles, I used EPS to determine the intrinsic value of the company. However, using this metric overlooks one of Thermo Fisher’s greatest strengths: its ability to convert earnings into cash flow.

Over the years, Thermo Fisher has consistently converted more than 100% of its net income into free cash flow, which is a remarkable quality. For this reason, I believe that FCF per share offers a better valuation metric than earnings per share. It more accurately reflects the company’s ability to generate cash, which ultimately drives value for investors.

So, with this adjustment, here’s my base-case scenario for Thermo Fisher in the coming years:

• Moderate sales growth of 4% for next year, followed by 8% long-term growth. Let’s remember that the company’s goal is to achieve 7-9% growth, so we are settling on the midpoint, which, I think, is reasonable to achieve.

• Gradual margin expansion in line with the projections presented by the company during its Investor Day.

• Free cash flow conversion of 110%.

• Annual share buybacks of 0.7%, consistent with what they’ve been doing in recent years.

• Exit multiple of 25x FCF. In my opinion, this is fair, given the superiority of Thermo Fisher’s business model and its terminal growth potential.

Based on this scenario, we arrive at a fair value of $882 for 2030, which, discounted at 9%, gives us a present fair value of $526. It’s worth noting that we haven’t accounted for net debt or the small dividend the company pays, but in this case, these don’t have a significant impact on the final valuation. Therefore, to achieve a 9% annual return, we should buy shares in the range of $520-535.

In summary, I don’t think this company will make you a millionaire, but if you’re looking for a conservative option with limited risk within the healthcare sector, I believe Thermo Fisher is a very good choice. As we’ve seen, we can conservatively expect returns of 9-10% from this company. However, if you’re aiming for slightly higher profitability, I’d recommend being patient and trying to buy it below $500.

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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Thermo Fisher: The Cycle Has Already Turned Around appeared first on Up2info.com.

• Thermo Fisher Scientific is well-positioned for growth due to its consistent revenue streams, strong M&A track record and minimal macroeconomic dependence.
• Despite a COVID-related revenue surge and subsequent correction, the company’s valuation multiples are now reasonable, offering potential for capital appreciation.
• 2025 growth drivers include improved biotech funding and China’s government stimulus.
• Risks include higher debt costs, geopolitical tensions with China, difficulty in impactful acquisitions, and reduced diversification due to industrial end-market exposure.
• I rate the company as a Buy, as its valuation multiples are reasonable, and I expect growth to resume in 2025 and beyond.

Introduction

In my portfolio, I usually combine high-growth semiconductor stocks with others that have low statistical correlation to the sector. For these diversifying stocks, I look for earnings persistence, minimal dependence on macroeconomic conditions and at least a 10% EPS CAGR.

Thermo Fisher Scientific (NYSE:TMO) fits these criteria due to its consistent revenue streams in healthcare and life sciences, which are less sensitive to economic cycles, and its strong track record of growth through M&A activities.

In this article, I’ll discuss how COVID-19 boosted the company’s revenue and earnings, leading to an overvaluation, and how the subsequent decline in COVID-related revenue disappointed the market, resulting in a stock price correction. I believe that following this cycle, the company is well positioned to return to its previous growth trajectory, offering an opportunity for capital appreciation as today’s valuation multiples appear reasonable.

The Present

Over the years, Thermo Fisher has built a wide and robust portfolio of life science instruments and consumables. Aiming to become a one-stop shop for customers, the company has invested aggressively in acquisitions, deploying more than $50 billion since 2010.

As we’ll see, the life sciences solutions and specialty diagnostics segments were the most affected by the pandemic-related revenue surge and have now returned to more normal levels.

Even with the extra revenue now gone, the pandemic helped to solidify Thermo Fisher’s status as a critical supplier, extending the company’s reach to a broader customer base, including governments.

Having nearly 83% of its revenue derived from services and consumables is particularly advantageous. This high proportion of recurring revenue makes the company less susceptible to cyclical market dynamics.

The Last Quarter

Thermo Fisher Scientific’s Q3 2024 results showed revenue of $10.6 billion, flat year-over-year, with organic growth at 0%. Adjusted EPS reached $5.28, allowing the company to slightly raise its full-year adjusted EPS outlook to $21.35–$22.07, while maintaining its revenue guidance at $42.4–$43.3 billion.

By segment, Life Sciences Solutions remained soft due to weaker pharma and biotech demand, while Analytical Instruments performed well, thanks to strong growth in electron microscopy. Specialty Diagnostics grew both reported and organically by 4%, supported by strong consumables demand in immunodiagnostics and transplant diagnostics. Laboratory Products and Biopharma Services remained flat.

Despite recent headwinds, results suggest stabilization in core life science markets. The company also highlighted its innovation capabilities with new product launches, such as a transmission electron microscope, and anticipates improving end-market conditions.

Management appears optimistic about two possible growth drivers for 2025:

• Improved biotech funding and growing confidence, which should ultimately benefit Thermo Fisher Scientific’s revenue, despite some lag.

• China’s new equipment stimulus and loan programs, which could bolster industry demand starting in 2025 and beyond.

The History

From 2012 to the end of 2019, the company’s revenue grew steadily, with a compound annual growth rate (OTC:CAGR) of 10.74% (as indicated by the dashed line), and growth remained relatively stable at around this level. During the same period, operating profit achieved a CAGR of 14.52%, demonstrating the effectiveness of the company’s operating leverage model.

The segments’ revenue CAGR from 2016 to the end of 2019 are as follows.

• Life Sciences Solutions: 8.84%
• Analytical Instruments: 14.61%
• Specialty Diagnostics: 3.65%
• Laboratory Products and Biopharma Services: 16.38%

With the pandemic, things changed. Between the end of 2019 and the end of 2021, Life Sciences Solutions revenue climbed from $6,856 million to $15,631 million, representing nearly 128% growth. Specialty Diagnostics grew from $3,718 million to $5,659 million, and Laboratory Products increased from $10,599 million to $14,862 million. These improvements far surpassed historical averages, largely driven by demand that proved unsustainable over the long term.

By looking at the company’s historical growth trends, we see that while revenue surged in 2020, 2021, and 2022, it then underwent a natural correction in subsequent years. Now revenue is back in the level predicted by the average CAGR of 10.74%.

Another indicator of the company’s stability is the trend in its organic growth and the diminishing influence of COVID testing revenue, as illustrated below. After a prolonged period of negative results, organic growth reached zero in the last quarter. Simultaneously, the COVID testing revenue contribution also went to zero after previously negative contributions.

The Plan

During their latest analyst day in September 2024, Thermo Fisher disclosed its long-term financial strategy, which largely continues the same approach it has been following. The company expects to allocate 60–75% of its available capital to mergers and acquisitions, with the remainder returned to shareholders through buybacks and dividends.

This financial model relies on market and organic growth, return on invested capital and margin expansion.

I’ll use this guidance as input for my model.

Risks

The main risks associated with my Buy rating are as follows.

1. Higher Cost of Debt:Although the company has a strong track record of acquiring other firms using debt, current U.S. interest rates are significantly higher than they were over the past decade. Bears argue this may compromise the company’s return on invested capital (ROIC).

2. Exposure to China:The company derives a decent portion of its revenue from China (Asia-Pacific is at 18%), and escalating geopolitical tensions, particularly under the Trump administration, could limit its ability to sell into that market or lead to additional tariffs. Moreover, China, previously a key growth driver, is likely to experience slower economic expansion going forward.

3. Difficulty in Finding Impactful Acquisitions:The company is already very large, so any new acquisition must be substantial, and therefore likely expensive, to meaningfully move the needle. Furthermore, as the company continues to pursue acquisitions, it becomes increasingly difficult to identify targets offering clear synergies and straightforward returns on capital.

4. Reduced Diversification:The presence of an industrial end-market segment can reduce the stock’s overall diversification benefits and diminish its insulation from broader economic cycles.

Peer Analysis

Danaher (DHR) is the company most comparable to Thermo Fischer. However, Seeking Alpha’s quant comparison gives Thermo Fisher the advantage, with better growth and EPS revisions.

A deeper look at the valuation metrics shows that Thermo Fisher has lower multiples across nearly all measures:

Valuation

To evaluate the company’s value, I use a range of scenario analyses:

• Organic Growth: I assume an organic growth rate of 7–9%, as guided by the company.

• Operational Leverage: In Scenario 3, I use a value of 1.5, which is both historically verified and guided by the company. For other scenarios, I apply more conservative leverage values.

• Valuation Multiples: For the conservative case (Scenario 1), I use today’s multiples minus one standard deviation based on the past three years. For the bull case (Scenario 3), I use today’s multiples plus one standard deviation.

• Discount Rate: I apply a WACC of 9% across all scenarios.

Based on the analysis and the values considered, I believe this is an asymmetric opportunity that points to a buying case. Furthermore, if we consider the company’s historical average multiples, we could see additional returns if the multiple reverts to those levels.

Conclusion

I rate the company as a Buy, as COVID-related revenue losses are finally over. In addition, Chinese stimulus measures and a recovering biotech funding environment are likely to drive growth through 2025. I am also confident in management’s ability to execute good acquisitions, given their strong track record. Overall, the company’s valuation indicates asymmetric upside, and today’s multiples appear reasonable compared to historical ones.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of TMO either through stock ownership, options, or other derivatives. 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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Thermo Fisher Scientific: Renewed Growth Momentum After The Pandemic appeared first on Up2info.com.

• The reduction in revenues due to the decline in COVID-19-related products and services is expected to diminish or disappear in 2025.
• Thermo Fisher has been growing by acquiring other companies. This strategy led to the company growing 174% between 2017 and 2024 Q3 TTM.
• The company is filling more patents. In the first 11 months of 2024, Thermo Fisher had 254 published patents; its maximum number in a year.
• Thermo Fisher shows a long-term stable growth and its ROEs have been positive since 2000.

Investment Thesis

I think that Thermo Fisher (NYSE:TMO) is a good investment opportunity. The company has grown 174% between 2017 and 2024 Q3 TTM. The strategy of acquiring different companies has been the main factor for such growth. In addition, the Life Sciences Solution and Specialty Diagnostics segments exhibit revenue levels in line with the forecast of what they might have been if COVID-19 had not existed.

Thermo Fisher is filing more patents. Furthermore, the ratio of goodwill to revenues has reached its maximum value since at least 2016. These measures will help Thermo Fisher to innovate and develop new products and services. So, I believe they will contribute to increasing revenues.

Overview

Thermo Fisher is an international company headquartered in Waltham, Massachusetts, U.S. The company has four business segments; namely, Life Sciences Solutions, Analytical Instruments, Specialty Diagnostics, and Laboratory Products and Biopharma Services.

In 2024 Q3 TTM, the Laboratory Products and Biopharma Services segment represented 52% of Thermo Fisher’s revenues, while the other three segments accounted for the remaining 48%, as shown on the left chart below.

The company exhibits excellent income margins across its business segments. Life Sciences Solutions, Analytical Instruments, and Specialty Diagnostics have income margins over 26%, as depicted on the right chart above. Laboratory Products and Biopharma Services is the segment with the smallest income margin. In 2024 Q3 TTM, the segment reported a 13% income margin.

COVID-19

For companies like Thermo Fisher, COVID-19 has been the main factor in their financial performance. Thermo Fisher, Danaher (DHR), Abbott Laboratories (ABT), Bio-Rad (BIO), and IQVIA (IQV) have a sharp increase in their stock prices in common up to Dec 2021, as shown in the chart below. But, since that period, their stock prices have declined.

COVID-19 was the catalyst for the American government to increase the expenditure on healthcare. Before the pandemic, in 2019, the U.S. spent $10,169 per capita on healthcare. One year later, the figure increased to $11,031 per capita. Meanwhile, it declined to $10,331 per capita in 2022. These figures are in constant 2015 U.S. Dollars.

Returning to Thermo Fisher, COVID-19 is still affecting the company’s revenues. In fact, in the 2024 Q3 Earning Report, the firm indicates the following:

During the third quarter of 2024, revenues from pharma and biotech customers declined due to reduced demand for our products and services that support COVID-19 vaccines and therapies as well as a more muted macroeconomic environment, partially offset through strong commercial execution.

Market Expectation

I think, at this moment, COVID-19 is the main factor that holds back Thermo Fisher’s stock price. Since 2023 Q2, the net income has remained relatively flat, as shown in the next chart. Thus, until the firm cannot show signals that its net income has recovered the upward trend perceived up to 2020, investors will likely be cautious about investing in Thermo Fisher.

Financial Data

Up to this point, in my point of view, COVID-19 has marked Thermo Fisher’s financial performance. However, I believe the company is close to leaving that period.

Since 2021, Thermo Fisher’s Life Sciences Solutions segment, and Thermo Fisher’s Laboratory and Biopharma Services have seen a decline in their revenues, as depicted in the next chart. However, I think both segments will see an increase in their revenues in 2025.

I think a good approximation is to calculate the compound annual growth rate of the revenues for the Life Science Solutions and Specialty Diagnostic segments, between 2016 and 2019. This period ended before the COVID-19 outbreak. Thus, these rates can be seen as a proxy for the real revenue growth rate for both segments, as they are not affected by the pandemic. My assumption is that the projected revenues for the period 2020-2024 Q3 TTM, using the compound annual growth rate calculated during 2016-2019, should have similar values with the real values of 2024 Q3 TTM to consider that the COVID-19 effect has vanished. I try to show the reader what might have occurred with the revenues if the coronavirus had not existed.

The following table shows the CAGR of the revenues for Life Sciences Solution and Specialty Diagnostics, between 2016 and 2019.

At this point, it is necessary to forecast the revenues. When doing so, the forecasted revenues for Life Sciences Solutions (dotted red line) in 2024 Q3 TTM were $10,254 million, while the real revenues were $9,496. So, for 2024 Q3 TTM, the forecast is in line with the real value, as shown in the next chart.

When forecasting the revenues of Specialty Diagnostics for 2020 to 2024 Q3 TTM, using the revenues’ CAGR computed during 2020-2023 Q3 TTM, the forecast revenues (dotted red line) in 2023Q3 TTM were $4,448 million. Meanwhile, the actual revenues were $4,460 million, as shown in the previous chart. Both values are similar, which leads me to the conclusion that the revenues have returned to their normal growth rate.

M&A

The previous sections discuss the COVID-19 effect on Thermo Fisher’s financial performance. However, they did not shed light on what successful strategies the company implemented to increase its sales. This section will discuss how Thermo Fisher has grown by acquiring other companies. In fact, the company expects that mergers and acquisitions (M&A) will represent 60%-75% of its capital deployment. This section will discuss some of the most important of Thermo Fisher’s acquisitions since 2017.

In 2017, Thermo Fisher acquired Patheon for $7,360 million. Thanks to this operation, the revenues of the Laboratory Products and Biopharma Services segment saw a yearly increment of 28.28% in 2018, as shown in the next chart. The other relevant acquisition in this segment was in 2021. That year the company acquired PPD for $16,036 million. The next year, the revenues of the Laboratory Products and Biopharma Services segment increased 51.47% year on year.

The Laboratory Products and Biopharma Services segment benefited from the acquisitions of Patheon and PPD. The segment accounted for more than 50% of the Company’s revenues in the 2024 Q3 TTM, in part due to these acquisitions.

M&A has also played an essential role in the Life Science Solutions segment. In 2021, Thermo Fisher acquired PetroTech for $1,864 million. In the next year, the segment revenues declined by 13.43%, as depicted in the next chart. However, COVID-19 was the main factor of that decline, without the PetroTech acquisition, the drop in sales would have been higher. In 2024, Thermo Fisher acquired Olink Holding for approximately $3,100 million. I think the Olink Holding acquisition could revert the decline of the revenues observed in the Life Science Solutions segment since 2022.

Services: CRO and CDMO

Service revenues are becoming increasingly important to Thermo Fisher. From 2018 to 2023, the revenues attributed to services grew by 221%. In addition, in 2023, services were 41% of the revenues, as shown in the next chart.

Before moving on, the reader must understand the five phases of clinical research. The development of a new medicine or vaccine is a costly process. Developing a new drug can range from $314 million to $4,460 million. In addition, on average, the development of a new drug takes 10-15 years. The full process is divided into five phases, which are:

• Discovery and development
• Preclinical research
• Clinical research
• FDA review
• FDA Post-Market Safety Monitoring

Thermo Fisher is growing in the five phases of the development of clinical research. The company provides the service and logistics for developing a new medical drug on behalf of other companies. In fact, the most important acquisition of Thermo Fisher (Patheon and PPD) offers these services.

PPD is the leading company offering Contract Research Organization (CRO) solutions. A CRO is a contract in which a third company will provide the research and development of a new drug or vaccine. This service focused on clinical trial services. So, the service corresponds to the second and third phases of developing a new drug. Thermo Fisher’s Revenues from CRO were $8,000 million.

Patheon offers contract development and manufacturing organization (CDMO). A CDMO provides services to implement the five phases of developing a new drug. In 2023, this segment brought $7,000 million to Thermo Fisher. CRO and CDMO are part of the Laboratory Products and Biopharma Services segment.

Intangible Assets

Patent filings is another point that is worth mentioning. In the first 11 months of 2024, Thermo Fisher has 254 published patents, and it is the first time that surpasses the 200 mark in a year, as shown in the next chart. In my article about Bio-Rad (BIO), I explain what a patent publication is.

Thermo Fisher is doing more research, which means developing or improving its existing portfolio of products and services. These higher patent filings will bring products and services with more innovation to the market. Thus, these innovations could positively influence Thermo Fisher’s revenues and earnings.

Intangible asset is another area to pay particular attention to. The acquisitions executed since 2020 have caused an increase in the goodwill-to-assets ratio. In fact, in 2024 Q3, as shown in the table below, this ratio reached 47%, which is its highest value since 2016.

Solid Financial Grounds

I think it is appropriate to start this section by quoting a paragraph from Warren Buffett’s 2023 annual letter to shareholders:

At Berkshire, we particularly favor the rare enterprise that can deploy additional capital at high returns in the future. Owning only one of these companies – and simply sitting tight – can deliver wealth almost beyond measure.

Thermo Fisher is on solid financial grounds. Since 2020, the company has been able to achieve positive returns on equity, as depicted in the next chart. So, Thermo Fisher has been successful in generating positive earnings. The only pitfall is that the ROE has been fluctuating around 10% since 2000, which is not a high return level. In addition, Thermo Fisher has deployed capital by acquiring new companies. The chart shows how the company has seen its revenues increase for several years.

I think the mix between growth and earnings is the main factor. It means the company has been successful in expanding its operation, but without neglecting its earnings.

Risk

The most important companies acquired by Thermo Fisher are in the Laboratory Products and Biopharma Services segments. However, this segment has the lowest income margin, with 13%. I consider that Thermo Fisher is not optimally investing its resources. Thus, if this segment suffers a decline in its income margin, Thermo Fisher’s stock price could suffer a significant drop. The Laboratory Products and Biopharma Services segments accounted for 52% of Thermo Fisher’s revenues in 2024 Q3 TTM.

The long-term obligation is another factor to mention. In 2021, Long-term obligations jumped 69.22% to $32,333 million. Meanwhile, in 2024 Q3, this figure was $31,197 million. The company has not prioritized its effort to reduce this debt. So, if there is a downtrend in Thermo Fisher’s revenues for several years, the company could have serious problems repaying its long-term obligations.

Peer Analysis

This section will implement the peer analysis among Thermo Fisher, Danaher (DHR), Lonza Group (OTCPK:LZAGY), Agilent (A), IQVIA (IQV), Bio-Rad (BIO), and Abbott Laboratories (ABT). I selected these companies because they compete with Thermo Fisher in at least one of its business segments.

Thermo Fisher excels in its 5-year revenues growth and stands as the leader among its peers. However, for 2024, the company expects a 0.15% growth in its revenues. Regarding the return on equity, Thermo Fisher ranks fourth among its peers. Thus, it is on the average side.

In the four valuation metrics presented, Thermo Fisher shows that it’s average among its peers. Thermo Fisher has the third highest P/E ratio with 32.55. In addition, the company exhibits a price-to-book of 4.14.

The ratio of total debt-to-equity is the most important aspect to worry about. Thermo Fisher has the second-highest total debt-to-equity ratio, at 72.33%. However, the debt is still below the equity. In addition, the debt-to-free cash flow ratio is 7.56, which in my opinion is an aspect to be concerned about.

Due to the analysis presented in this section, the market has not rewarded Thermo Fisher. The company exhibits the second-lowest 1-year return with 7.10%. However, when considering a longer time frame, five years, Thermo Fisher’s stock price has grown 71%, while the leader, DHR, has a 90.58% increase in its stock price.

All in all, I think Thermo Fisher is a well-balanced company. The company does not exhibit metrics that indicate red flags. For example, IQV exhibits the highest ROE, but at the same time, is the most indebted company. It is not necessary to have the highest ROE when on the other side of the equation, there is a massive debt. So, the prudence that Thermo Fisher uses to manage its operation is the most important aspect. As Aristotle said, virtue is the mean between two extremes.

Conclusion

In light of the analysis presented in this article, I consider that Thermo Fisher is an excellent investment opportunity. First, the company has been successful in acquiring companies. Partly due to this strategy, Thermo Fisher’s net income grew at an annual compound rate of 16.10%, between 2017 and 2024 Q3 TTM.

COVID-19 is not expected to be a factor that will hold back Thermo Fisher’s revenues. In 2022, the U.S. expenditure per capita in healthcare returned to the values observed before the coronavirus. In addition, when forecasting the revenues of the Life Sciences Solutions and Specialty Diagnostics segments for the period 2020-2024, using the revenues’ growth rate of each segment calculated during the period 2016-2019 enables one to see what might have been the growth of the revenues without the effect of the COVID-19. In 2024 Q3 TTM, the forecasted revenues are in line with the real values observed in that quarter.

The investment in intangible assets is another factor to mention. Thermo Fisher is filing more patents, and in 2024, the company has reached its highest patent publication numbers. In addition, with the acquisition of new companies, the goodwill-to-assets ratio has seen its maximum value since at least 2016. This effort will help the company to develop and improve its portfolio of products and services.

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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Thermo Fisher: M&A And Innovation To Drive Sales Growth appeared first on Up2info.com.

• Thermo Fisher Scientific has strong growth prospects due to easing COVID-19 headwinds, improving Chinese and biotech markets, and favorable funding environments.
• The company’s margins should benefit from volume leverage, cost-saving initiatives, M&A synergies, and favorable price/mix as organic growth improves.
• TMO’s valuation is attractive, trading at a discount to historical averages and peers like Danaher, suggesting potential for P/E multiple re-rating.
• Given the positive growth outlook and attractive valuation, I have a buy rating on Thermo Fisher Scientific.

Investment Thesis

Thermo Fisher Scientific Inc. (NYSE:TMO) has good growth prospects ahead. The company’s revenue growth should benefit from easing year-over-year comparisons and dissipating COVID-19 Vaccines and Therapies-related headwinds. In addition, improving Chinese end markets thanks to increasing clarity for government stimulus packages, and recovering the biotech end market due to improving funding environment should also help the company in delivering positive growth moving forward. In addition to good organic growth, I am also expecting good inorganic contributions from acquisitions given a reasonable leverage and reversal in the interest rate cycle.

On the margin front, the company should benefit from volume leverage as sales improve, cost-saving initiatives, M&A cost synergies, and favorable price/mix. The company’s valuation also looks attractive as it is trading at a discount to its historical averages as well as at a discount compared to high-quality peers like Danaher (DHR). Hence, given the good growth prospects ahead and an attractive valuation, I have a buy rating on the stock.

Thermo Fisher Scientific’s Revenue Analysis And Outlook

After seeing a solid demand during the COVID-19 period, the company sales have declined in the recent year due to headwinds from reduced COVID-19-related sales and cautious customer spending. However, the sales seem to be bottoming at the current levels.

In the third quarter of 2024, the company’s revenue of $10.598 billion was flat Y/Y and grew by 0.5% sequentially from Q2 2024. Core organic revenues, which exclude the impacts of COVID-19 testing revenue, acquisitions, and currency translation, were also flat Y/Y.

Segment-wise, in the Life Sciences Solutions segment, revenues declined by 2% Y/Y on a reported basis and 4% Y/Y organically, mainly due to moderation in COVID-19-related revenue. The Analytical Instruments segment’s revenue increased by 3% Y/Y organically, driven by strong growth in the electron microscopy business. In the Specialty Diagnostics segment, both reported revenue and organic revenue grew by 4% Y/Y attributed to increased revenues in the transplant diagnostics and immunodiagnostics businesses, as well as the healthcare market channel. Finally, in the Laboratory Products and Biopharma Services segment, both reported and organic revenue were flat Y/Y as growth in the research and safety market channel and the clinical research business was offset by lower revenues from COVID-19 vaccines and therapies.

Moving forward, I am optimistic about the company’s growth prospects. After three years of declining organic sales, comparisons are easier and most of the COVID-19-related sales run down has already happened. So, we are close to the bottom in terms of organic sales.

The company’s organic growth decline went from -4% Y/Y in Q1 2024 to -1% Y/Y in Q2 2024 to flattish in Q3 2024. If we look at last year’s organic sales declines, it went from -3% Y/Y in Q3 2023 to -7% Y/Y in Q4 2023. So, the company will see ~400 bps easier comparisons in Q4 and should return to organic growth based on this easier comparison alone.

Another interesting thing to consider is that the decrease in COVID-19 vaccines and therapies was around 300 bps of headwind last quarter. Excluding it, the underlying sales growth was positive. Moving forward, the COVID-19 vaccine and Therapies related headwinds are decreasing and, according to management, FY25 should be the last year with these headwinds and the impact in FY25 being lesser than that seen in FY24. So, the lesser impact from this headwind should also help sales growth.

Some of the company’s key end markets that faced challenges in recent years are also expected to improve moving forward. China has been challenging and while the Chinese government announced a stimulus package, it didn’t help the company’s sales as there was a lack of clarity around rules and the customers delayed orders as they waited for more clarity around rules and deployment of funds. However, this should change moving forward and as these funds get deployed, we should see the Chinese market becoming a tailwind in FY25 compared to a headwind in FY24.

Another end market that was challenging in the last couple of years was biotech, but the funding environment there is also improving. With interest rate cycle reversal and broader sentiments in equities turning to risk-on mode, I expect continued improvement in this market. There is usually some lag between funding and deployment. So, while this improvement is not yet getting reflected in the recently reported sales, it should become apparent over the next few quarters.

Below is the relevant excerpt from last quarter’s earnings call, where management talked about improving the biotech market,

“The 2 things we did talk about, about what could change the range for this year was how would biotech perform in terms of funding and what would happen in China, right? And biotech is progressing in the right direction. Funding is improving, confidence is improving. As you know, there’s a lag between funding and ultimately how that flows into our industry. So that’s encouraging relative to what we saw certainly in the previous couple of years in that dimension. So that kind of helps you think a little bit about market conditions going forward.”

Marc Casper, Chairman and Chief Executive Officer, Thermo Fisher

In general, a lower interest rate environment reduces loan cost for funding equipment purchases, and this should be a positive for demand.

The company is also executing well in terms of innovation. Recently, the company’s Orbitrap Astral Mass Spectrometer won gold in the R&D 100 Awards (which recognizes the most revolutionary product in Science and Technology) under the market disruptors special recognition category where it was recognized as one of the most significant advancements in mass spectroscopy in the previous year. Management noted that adoption of Orbitrap Astral continues to be strong, and I believe the company’s innovation is helping it gain share and charge better prices despite challenging market conditions.

Overall, I am optimistic about the company’s organic growth prospects helped by easing comparisons, run off of COVID-19-related headwinds, benefit from China stimulus, improvement in biotech demand, and good execution.

In addition, the company has a solid track record of value creation through M&As. Last quarter, the company deployed $3.1bn in the Olink acquisition. The company’s net leverage (net debt to EBITDA) was at a comfortable 2.7x as of the last quarter end, and I expect continued M&As to complement organic growth moving forward as well.

Thermo Fisher Scientific’s Margin Analysis And Outlook

In Q3 2024, the company’s margins were affected by an unfavorable volume mix, retention costs related to the Olink acquisition, and elevated growth investments which more than offset the benefits from productivity improvement. As a result, the company’s adjusted gross margin contracted by 20 bps Y/Y to 41.8% and the adjusted operating margin declined by 190 bps Y/Y to 22.3%.

On a segment basis, the operating margin contracted by 50 bps Y/Y in the Life Sciences Solutions, 180 bps Y/Y in the Analytical Instruments, 20 bps Y/Y in the Specialty Diagnostics, and 290 bps Y/Y in the Laboratory Products and Biopharma Services segments.

Looking forward, the company’s margins should benefit from volume leverage as organic growth improves. The company is also doing a good job in terms of cost reduction through its Practical Process Improvement (PPI) business systems. Last quarter, the company further enhanced the supply chain in Asia-Pacific by optimizing inventory across its network, while in Europe, it streamlined and automated the manufacturing process for high-end analytical instruments to meet strong demand. While the benefit from these cost improvement initiatives is not that apparent currently because of challenging demand conditions, once the volumes pick up we should see good incremental margins given the reduced cost structure. In addition, integration synergies from recent M&As and pricing/mix improvement from continued innovation should also help margins. So, I am optimistic about the company’s margin prospects.

Valuation

TMO is currently trading at 22.99x FY25 consensus EPS estimates of $23.58 and 20.55x FY26 consensus EPS estimates of $26.37. Over the last five years, the stock has traded at an average forward P/E of 24.78x.

The company’s revenues and EPS are expected to be flattish this year but resume growth from next year onwards. I believe as the company’s growth improves, its stock should see a re-rating in the coming years, and it should return close to its historical mid-20s P/E (forward) range.

The company’s valuation multiple is also at a discount versus its peer Danaher which is another high-quality company exposed to similar end markets and is trading at a mid to high 20s P/E valuation range based on FY26 and FY25 EPS. So, there is some potential to close this gap.

A potential P/E multiple re-rating coupled with good growth prospects makes TMO stock a good Buy.

Risks

• The incoming Trump Administration is known for strict tariff policies. TMO due to its global sales and supply chain exposure, is not immune to tariffs. Last time, the company was able to navigate it well through price increases and changes in the supply chain. I expect a similar response to any tariffs this time as well. Nevertheless, it may cause temporary short-term disruptions until the company adjusts to them.

• The company’s inorganic growth strategy is relatively riskier than organic growth as there is always a risk related to overpaying for an acquisition, execution issues with integrations, etc.

Takeaway

In my view, Thermo Fisher Scientific Inc.’s growth outlook looks positive moving forward after seeing a decline over the past years. The company’s revenue growth is nearing a bottom, and I expect it to inflect positively in the coming quarters thanks to easier comparisons. Additionally, COVID-19 vaccines and Therapies-related headwinds that impacted sales over the past years are also dissipating, supporting sales ahead. Furthermore, improvement in end markets given increasing clarity from the Chinese government stimulus package and improving funding environment within the biotech end market should also support sales growth ahead. Lastly, good traction toward the company’s innovations should help increase market share. These tailwinds along with inorganic growth from M&As should help the company deliver positive sales growth ahead. This improving sales should also provide good operating leverage which, along with cost-saving initiatives, M&A cost synergies, and favorable price/mix should help in margin growth.

So, the company has good prospects ahead. The valuation also looks favorable as it is trading at a discount to historical averages as well as its peer Danaher. As the company’s sales turn positive moving forward, I believe the P/E multiple should re-rate to its mid-20s historical levels, providing a good upside. Hence, I have a buy rating on the stock.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in TMO, DHR over 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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Thermo Fisher Scientific: Near The Bottom And Attractively Valued appeared first on Up2info.com.

• I am upgrading Thermo Fisher Scientific Inc. to a “Buy” with a fair value of $610 per share due to anticipated recovery in the pharma and biotech industries.
• Thermo Fisher’s high-impact innovations and strategic M&A, including the acquisition of Olink, support a 7%-9% organic revenue growth and mid-teens EPS growth.
• Q3 results show stabilization in life sciences, with raised full-year adjusted EPS guidance, maintaining revenue guidance of $42.4 to $43.3 billion.
• Despite risks in China, I favor Thermo Fisher’s diversified portfolio and growth capabilities, projecting 9% organic revenue growth and 30bps annual margin expansion.

For Thermo Fisher Scientific Inc. (NYSE:TMO), I highlighted the downturn in the pharma and biotech industry as well as weak growth in China in my previous article published in January 2024. I anticipate the overall pharma and biotech industry will start to recovery as the Fed has begun to cut the interest rate. After several quarters of decline in China, I anticipate the market will start to normalize for Thermo Fisher Scientific. Their Q3 result demonstrated some end-market stability, particularly in the life science market. Therefore, I am upgrading to a “Buy” with a fair value of $610 per share.

2024 Investor Day

Thermo Fisher Scientific had their 2024 investor day on September 19^th. I think the major takeaway can be summarized as follows:

• High-impact innovations: Thermo Fisher Scientific has a broad range of portfolios across the life science, analytical instruments, specialty diagnostics and laboratory products. The company spends $1.3 billion in R&D with 7,200 R&D scientists and engineers, making solid progress in key technologies including proteomics, precision medicines, biology and advanced materials. The high-impact innovation enables the company to launch new products with higher selling price, sustaining their 7%-9% organic revenue growth with margin expansion.

• M&A: Thermo Fisher Scientific plans to allocate 60%-75% of total capitals towards M&A, focusing on high-ROI areas. In July 2024, the company completed the acquisition of Olink, a leading provider of next-generation proteomics solutions, for $3.1 billion. Olink’s technology for proteomics could strengthen Thermo Fisher Scientific’s mass spectrometry and life sciences offerings. The management anticipates Olink will grow in the mid-teens in the future, with $200 million annual revenue in FY24. I view these acquisitions as highly accretive to shareholders.
• Lastly, Thermo Fisher Scientific provides a very attractive playbook for their future growth: 7%-9% organic revenue growth rate and mid-teens EPS growth. I think the growth ambition is aligned with their historical track record.

Q3 Result & Outlook

Thermo Fisher Scientific released its Q3 result on October 23^rd before the market opened, delivering 0% organic revenue growth, as shown in the chart below. My key takeaway from the quarter is their core life sciences business has started to stabilize in recent quarters. The company raised its full-year adjusted EPS guidance to $21.35 — $22.07, up from its previous guidance of $21.29 — $22.07 while maintaining its revenue guidance of $42.4 to $43.3 billion.

During the quarter, the company launched their transmission electron microscope, a fully integrated multimodal analytical solution for chemical research. It is a perfect example of how Thermo Fisher Scientific executes their high-impact innovations, as discussed previously.

As the company has already delivered their results for three quarters, I don’t expect FY24’s actual result to deviate significantly from their guidance. For growth from FY25 onwards, I am thinking about the following factors:

• Life Sciences Solutions: The business segment has been significantly impacted by the weak market in pharma and biotech industries, declining by 12% in FY22 and another 26% in FY23. As the Fed began to cut interest rates, I anticipate the capital funding environment in pharma and biotech industries will gradually recover in the near future. I anticipate the segment will grow by 9%, aligned with the trend in a normalized economic environment.
• Analytical Instruments: Thermo Fisher Scientific is focusing on the broad array of analytical technologies for biology market. In addition, the company is investing in advanced materials and chemical analysis. I anticipate the segment will grow by 10% annually.
• Specialty Diagnostics: Their Specialty Diagnostics business covers clinical diagnostics, immunodiagnostics, microbiology and transplant diagnostics, with the majority of revenue generated from consumables. I project the segment will grow by 8% annually, primarily driven by the demands for service and consumables.
• Laboratory Products and Services: I project the segment will grow by 9%, in line with historical trends.

As such, I calculate Thermo Fisher Scientific’s revenue will grow by 9% organically. In addition, I anticipate the company will allocate 8.5% of total revenue towards M&A, contributing 2.4% growth to the topline.

I model 30bps annual margin expansion, driven by 10bps from new product launches, 10bps from SG&A reductions and 10bps from ongoing restructuring efforts. The WACC is calculated to be 9% assuming: risk-free rate 3.7%, beta 0.82; cost of debt 5%; equity risk premium 7%; equity balance $229 billion; debt $35 billion; tax rate 10%.

With these parameters, the DCF can be summarized as follows:

After discounting all the future FCF, the fair value is calculated to be $610 per share, as per my estimates.

Key Risks

China represents around 8% of total revenue, and the revenue has been declining since Q4 FY22 due to the sluggish economy and weak marketing conditions in the pharma and biotech industries. Although the Chinese government has tried to stimulate the local economy, it is still in the early stages, and I am not sure if their biotech and pharma market will recover in the near future.

Verdict

Similar to Danaher (DHR), Thermo Fisher Scientific is a well diversified healthcare company, providing essential products and services to the overall pharma and biotech industries. I favor their capabilities in product innovation, M&A and organic growth. I am upgrading to a “Buy” with a fair value of $610 per share.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of TMO either through stock ownership, options, or other derivatives. 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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Thermo Fisher Scientific Q3: Expecting Market Recovery In FY25; Upgrade To ‘Buy’ appeared first on Up2info.com.

• Thermo Fisher has outperformed the market with a 420%+ return over the past decade, but its current valuation is high.
• The company’s recent results show mixed performance, with a slight revenue decline, but improved earnings per share and raised 2024 guidance.
• Despite strong growth prospects and market tailwinds, the stock’s high valuation and low dividend yield make it a hold for now.
• I recommend waiting for a better entry point, specifically a share price range of $544 to $565, before considering an investment.

Thermo Fisher Scientific Inc. (NYSE:TMO) has been one of the best-performing stocks over the last decade, with shares returning more than 420% over this period.

Over that same period, the S&P 500 Index has returned ~230%, as Thermo Fisher has easily outpaced the market index.

A return like this is reserved for only the highest of quality companies, but the valuation is very rich. Let’s look at why I am waiting for a better entry point into this great company.

Company Background and Recent Results

Thermo Fisher provides products that help its customers to accelerate advancements in life science research, improve patient diagnoses, and help increase the effectiveness of both domestic and international laboratories.

The company has four reportable segments, including, Laboratory Products and Biopharma Services, which provides products used in laboratories and clinical research, Life Sciences Solutions, which offers reagents, instruments, and consumables for biological and medical research, Analytical Instruments, which provides instruments and other products for research and clinical laboratories, and Specialty Diagnostics, which offers specialized equipment for various needs.

Thermo Fisher generates annual revenue of more than $42 billion and is valued at $231 billion, making the company one of the largest in its industry. Slightly more than 80% of the company’s revenue comes from services and consumables, with instruments making up the remainder.

Thermo Fisher’s second quarter, which was announced at the end of July, was mixed. Revenue fell 1.4% to $10.5 billion while adjusted earnings-per-share of $5.37 improved from $5.15 in the same period of 2023. Both results did top estimates.

By individual segments, Laboratory Products and Biopharma Services declined 1.3% to $5.76 billion while Life Sciences Solutions was down 4.4% to $2.36 billion. Analytical Instruments grew 1.9% to $1.78 billion and Specialty Diagnostics improved 0.7%.

Management did raise its guidance for 2024. Revenue is now projected to be in the range of $42.4 billion to $43.3 billion, which would represent growth of just 0.1% at the midpoint.

Earnings-per-share are expected to be in the range of $21.29 to $22.07, up from $21.14 to $22.02 previously.

The analyst community is slightly more bullish for the year.

While this year is expected to see relatively stable earnings results, those covering Thermo Fisher expect near double-digit earnings growth in both 2025 and 2026. This would mark a return to much better results than the company experienced before and directly after the pandemic.

Long-Term Trend of Outperformance

Some of the stock’s returns over the last decade can be attributed to the company’s performance during and immediately after the Covid-19 pandemic. Thermo Fisher was the first company to bring an accurate Covid-19 test to market during the pandemic, which greatly aided the business. Earnings-per-share surged 74% in 2020 and the company followed that up with a nearly 22% improvement the very next year.

As the pandemic eased and the demand for testing decreased, earnings-per-share did retreat, but they remain above pre-Covid-19 levels.

This is because Thermo Fisher is more than just a Covid-19 story. Yes, the company did benefit from the unprecedented demand for Covid-19 testing, but Thermo Fisher is a leading life science and research company.

The company maintains a very important position in healthcare as it provides the means for its customers in the sector to operate.

This leadership position has enabled Thermo Fisher to grow at a rapid pace. Even before the pandemic, the company was growing at a rapid pace. From 2014 to 2019, adjusted earnings-per-share almost doubled, which helped contribute to a compound annual growth rate of 15% for the last decade.

Revenue growth over this same period has generally been positive as the company’s only year of decline was last year.

Long term, the company believes that its market will see 4% to 6% revenue growth, but management has guided toward 7% to 9% organic revenue growth for Thermo Fisher. At the same time, margin improvements are also projected to aid results. In the most recent quarter, Thermo Fisher’s operating margin improved 10 basis points to 22.3% as expenses were down for the period. An improving margin should allow earnings growth to outpace revenue gains.

Margin expansion is something that the company has also proven successful at over the long term. From 2014 to 2023, the operating margin expanded 580 basis points to 17.1%. While that growth over the years is good, what is more impressive is that Thermo Fisher has projected an operating margin of 22.5% to 22.8% for 2024, which is markedly above what the company has historically produced.

There are additional reasons to be optimistic about the company besides just its track record and margin expansion.

First, Thermo Fisher enjoys some strong tailwinds to its business.

The global population continues to age. The number of people 65 and older is expected to grow by 50% by the middle of the next decade. With old age comes the need for additional healthcare services. The need for products that can aid further scientific advancement will be necessary to meet this need, which is a major reason governments around the world are spending so much on medical research.

Thermo Fisher is already among the largest in its industry and is well-known and trusted by its customers. This places it in an enviable position when it comes to addressing the demand that will come with an aging population.

In addition, the company can augment its core business through the use of mergers and acquisitions.

Thermo Fisher has been extremely active on the acquisition front in recent years. Most recently, the company completed its more than $3 billion purchase of Olink in early July. Olink is a leading name in the proteomics market, which is the study of proteins, and should complement Thermo Fisher businesses in this area.

Finally, Thermo Fisher spends heavily on research and development to further optimize its portfolio. The company spends ~3% of annual sales on R&D.

The combination of improving margins, tailwinds, and historical performance likely means that Thermo Fisher will be able to continue to produce double-digit earnings growth.

Dividend Analysis

Shares of Thermo Fisher yield just 0.3%, which is well below that of the healthcare sector.

This could make the stock unappealing from an income perspective, but the low yield is not for a lack of trying on the company’s part. After holding its dividend steady from 2013 to 2017, Thermo Fisher began to aggressively raise its payments to shareholders. The dividend has a 10- and 5-year compound annual growth rates of 9.9% and 15.5%, respectively.

The company continues to aggressively increase its dividend, which included an 11.4% raise for the first payment of this year and a nearly 17% increase last year. In total, Thermo Fisher has a dividend growth streak of 7 years.

Historically, Thermo Fisher has rarely offered a compelling yield, with shares routinely averaging an annual average yield below 0.5%.

The reason that the stock’s yield remains so low is because the share price appreciation has been so immense over the last decade. Most investors would likely trade income for the nearly 430% gain in the stock price.

The good news is that the dividend is well protected, leaving room for additional increases going forward. Using current EPS estimates, Thermo Fisher’s projected payout ratio for 2024 is just 7.2%, lower than the 10-year average payout ratio of 9.1%.

Thermo Fisher generates tremendous free cash flow, including almost $8 billion over the last four quarters. The company has averaged nearly $7 billion of free cash flow going back to 2020. During this period, the dividend free cash flow payout ratio was just 6.2%.

The yield might be lacking, but Thermo Fisher’s dividend is likely one of the safest in the marketplace when you consider its payout ratios.

Valuation Analysis

Given the change in share price over the long term, it is not surprising then that Thermo Fisher trades with an elevated valuation.

Currently, the stock trades at more than 28 times expected earnings-per-share. This is a premium to both the healthcare sector’s median figure and to the stock’s own historical average.

I would argue that Thermo Fisher does deserve to trade with a valuation that is higher relative to its peer group, given that the company has consistently demonstrated strong growth rates over a long period of time.

However, the current valuation does not leave much room for error in my estimate. A premium to the historical average, say 25 to 26 times earnings estimates, accounts for the quality of the company in my opinion, but at a more reasonable valuation. Therefore, I would look to add the stock in the $544 to $565 range, which is 6% to 11% below the current share price.

Risks to Investment Thesis

As much as I like the company, there are factors to consider that could lead to a price decline.

The healthcare sector is at risk for disruption. A misstep by Thermo Fisher or an ill-timed acquisition could cause the company to lose its leadership position.

The sector is full of companies that provide products and services that can be considered recession-proof, which has allowed for some names to have extensive dividend growth histories. While Thermo Fisher’s dividend growth has been impressive in the short term, the dividend has been paused for long periods of time before. This could happen again were the company to experience prolonged headwinds.

Importantly for income-seeking investors, the current yield is a fraction of the median yield for the sector. Those looking for higher levels of yield will likely be disappointed in what Thermo Fisher offers.

Lastly, while Thermo Fisher is expected to see a return to double-digit earnings growth as soon as next year, shares could see a valuation re-rating if the company fails to deliver on lofty targets, leaving investors holding a high multiple name that is struggling to grow at the expected rate. That could result in a steep drop in the share price.

Final Thoughts

There is a lot to like about Thermo Fisher, including its extensive growth track record, market tailwinds, and ability to outperform its peers.

That said, the valuation is higher than what the stock has traditionally traded with, and the dividend yield is extremely low. While I am not averse to owning lower-yielding stocks, I do prefer a higher margin of safety when adding names that trade with elevated multiples. At this point, Thermo Fisher trades above a valuation level I am comfortable with.

Therefore, Thermo Fisher is on my watch list, but I rate the stock as a hold until the valuation is closer to its historical average.

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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Thermo Fisher Scientific: Fantastic Company, Rich Valuation appeared first on Up2info.com.

Get ahead of the market by subscribing to Seeking Alpha’s Stocks to Watch, a preview of key events scheduled for the coming week. The newsletter keeps you informed of the biggest stories set to make headlines, including upcoming IPOs, investor days, earnings reports and conference presentations.

Central banks will be in the spotlight next week with the Federal Reserve, Bank of England, and Bank of Japan all scheduled to meet to discuss monetary policy and interest rate. Just before the Fed’s FOMC meets, the August U.S. Retail Sales will be released. While that report is expected to show a 0.1% decline on a month-over-month basis, the year-over-year retail sales number is anticipated to be solid. At the time of publication, futures trading implied a 57% probability of a 25-point cut and a 43% probability of a 50-point cut.

The event calendar features a flurry of investor conferences and meetings, including the high-profile Dreamforce event hosted by Salesforce (NYSE:CRM). There will also be earnings reports turned in by General Mills (GIS) (analysis), FedEx (FDX) (analysis), and Lennar (LEN) (full preview). The FedEx (FDX) report will be of high interest across several sectors, as it could delve into expectations for the holiday season.

While recession fears are clearly back in the mix. Seeking Alpha analyst Dilantha De Silva thinks the strength of the U.S. economy and a few other macroeconomic variables suggest that the U.S. is most likely to see slow and steady growth in the next few quarters. In particular, De Silva is focused on homebuilders that have gone out of favor among investors in the last two years due to the unfavorable rate environment. “Since large-scale homebuilders have continued to perform well, I believe the best opportunities are hidden among small companies that are likely to benefit from the positive impact of rate cuts,” he highlighted.

Earnings spotlight: Tuesday, September 17 – Ferguson Enterprises (FERG) See the full earnings calendar.

Earnings spotlight: Wednesday, September 18 – General Mills (GIS) and Steelcase (SCS). See the full earnings calendar.

Earnings spotlight: Thursday, September 19 – FedEx (FDX), Lennar (LEN), Darden Restaurants (DRI), and FactSet Research (FDS). See the full earnings calendar.

Volatility watch: Options trading volume is elevated on AST SpaceMobile (ASTS), as well as Trump Media & Technology (DJT) ahead of the anticipated expiration of the post-SPAC lock-up period. Trump Media (DJT) is down more than 50% over the last two months. The most overbought stocks per their 14-day relative strength index include Instil Bio (TIL), Ventas (VTR), and Elite Pharmaceuticals (OTCQB:ELTP). The most oversold stocks per their 14-day Relative Strength Index include Icahn Enterprises (IEP), Vital Energy Inc (VTLE), and Cybin (CYBN). Short interest is elevated on BioCardia (BCDA) and Childrens Place (PLCE).

Dividend watch: Companies that have an ex-dividend date coming next week include AIG (AIG), Iron Mountain (IRM), Broadcom (AVGO), and DICK’s Sporting Goods (DKS). Companies forecast to increase their quarterly dividend payouts include Graphic Packaging (GPK) to $0.12 from $0.10, Microsoft (MSFT) to $0.83 from $0.75, and Starbucks (SBUX) to $0.61 from $0.57. Read through some of the dividend stock picks from Seeking Alpha analysts.

FOMC preview: The Federal Reserve is expected to cut rates by either 25 or 50 points next week, after a long stretch of holding the benchmark rate at 5.25% to 5.50%. Analysts think the Fed will continue to emphasize data dependence and reserve its right to change the pace of cuts at future meetings. Chairman Jerome Powell is seen acknowledging higher downside risks, but maintaining a soft-landing base case for the U.S. economy. Investors will be highly focused on the dot plot, which could show consensus around 75 points of rate cuts in 2024 and another 125 points of rate cuts in 2025. Heading into the FOMC spotlight, Bank of America advised investors to fade any strong hawkish or dovish interpretation of the outcome of the meeting. Debate over the size of the potential first rate cut since 2020 has continued has inflation and the labor market have been cooling, with inflation heading toward its 2% target. Market expectations for a 50bp move dropped earlier this week after the August Consumer Price Index showed core prices rising more than expected, by 0.3% M/M vs. 0.2% estimate. On Friday, former New York Federal Reserve President William Dudley reportedly said there was a “strong” case to be made for a half-point rate cut next Wednesday, with weakening in the labor market a key risk.

Investor events: The Denver Gold Forum will take place over three days. Companies scheduled to present at one of the world’s most well-known mining equities investment forums include Solitario Resources (XPL), Equinox Gold (EQX), U.S. Gold (USAU), Hecla (HL), and Coeur Mining (CDE). Microsoft (MSFT) will hold a special event during which CEO Satya Nadella and Corporate Vice President Jared Spataro will discuss the next phase of Copilot innovation. Salesforce (CRM) will hold it Dreamforce 2024 event. The high-profile event will include talks from Salesforce (CRM) CEO Marc Benioff, AMD (AMD) CEO Dr. Lisa Su, FedEx (FDX) CEO Raj Subramaniam, and Camping World (CWH) CEO Marcus Lemonis. The KeyBanc Capital Markets Energy Transition Symposium will include participation from Ballard Power Systems (BLDP), FuelCell Energy (FCEL), Plug Power (PLUG), First Solar (FSLR), and SolarEdge Technologies (SEDG). Other notable investor events scheduled for the week, include HubSpot’s (HUBS) Analyst Day, T-Mobile’s (TMUS) Capital Markets Day, Arthur J. Gallagher & Co.’s (AJG) quarterly investor meeting with management, Thermo Fisher Scientific’s (NYSE:TMO) Investor Day, Union Pacific’s (NYSE:UNP) Investor Day, Arcadium Lithium’s (ALTM) Investor Day, QUALCOMM’s (QCOM) Investor Day, and Roblox’s (RBLX) Developers Conference.

FedEx earnings preview FedEx (FDX) will report FQ1 earnings on September 19. Analysts expect the parcel delivery giant to report revenue of $22.0 billion, consisting of $10.7 billion from the Express segment, $8.6 billion from the Ground segment, $2.3 billion from the Freight segment, and $69 million from the Services segment. FedEx (FDX) is also expected to disclose EPS of $4.85, an operating income rate of 7.6%, and free cash flow of $1.14 billion. Key topics for the earnings conference call will include the guidance update, expectations for the compressed holiday season, and the implications of the end of the USPS contract. Options trading implies a 7% swing in share price after the report is released. FedEx soared more than 15% after its last earnings report. The stocks with the highest trading correlation with FedEx (FDX) on its earnings day are United Parcel Service (UPS), Expeditors International (EXPD), and Landstar System (LSTR). The stocks with the highest trading correlation with FedEx (FDX) on its earnings day are United Parcel Service (UPS), Expeditors International (EXPD), and Landstar System (LSTR).

Electronic Arts event: Electronic Arts (NASDAQ:EA) will hold its first investor day event since 2016. Analysts think that EA management could discuss the game pipeline and set some new financial targets. There could also be an update on the recent launch of EA’s college football video game. “Launch month dollar sales of EA Sports College Football 25 more than tripled the total lifetime dollar sales of the previous best-selling college football game, NCAA Football 07,” noted Circana analyst Mat Piscatella on the initial consumer response. Bank of America also expects the company to devote time to opportunities outside its core user-pay games business. The event is seen as a significant opportunity to reset investor expectations on GME’s priorities and growth drivers. Shares of Electronic Arts (EA) are up 6.4% on a year-to-date basis.

The post Spotlight On FOMC’s 25 Or 50 Decision, FedEx Earnings, And Salesforce Event appeared first on Up2info.com.

• Thermo Fisher Scientific is a top dividend growth stock with a complex post-pandemic situation.
• Recent earnings show promising growth in key segments, despite a high valuation.
• Strategic investments in R&D and acquisitions position TMO for continued long-term success.

Introduction

Thermo Fisher Scientific (NYSE:TMO) is one of my favorite dividend growth stocks and one of the trickiest stocks due to the complicated post-pandemic situation.

As some readers may know, I own Danaher Corp. (DHR), the company’s largest peer, which has an extremely high stock price correlation. Thermo Fisher is held in several family accounts that I manage/advise.

My most recent article on this stock was written on June 7, when I went with the title “Low Yield, High Growth: Unveiling The Power Of Thermo Fisher’s Dividends.”

Since then, shares have risen by roughly 5%, beating the S&P 500 by three points. This was fueled by its just-released earnings, which showed a very promising picture of the return of post-pandemic growth and confirmed its many secular tailwinds.

Furthermore, we’ll discuss its valuation. Thermo Fisher is the only stock where we broke the rule of not buying a stock that is “obviously” undervalued. As we will find out in this article, TMO is not cheap. Especially after the pandemic, a lot of COVID-related tailwinds started to unwind, leaving the company with a “high” valuation and contracting growth.

Nonetheless, over the past ten years, the TMO stock price has still returned more than 400%, beating the S&P 500 and the Health Care Select Sector ETF (XLV) by a huge margin.

In this article, I’ll explain why we continue to buy TMO, believing it will allow us to beat the market with a fantastic anti-cyclical business model.

So, let’s get to it!

A Future-Proof Business Model

I’m fascinated by healthcare. By now, I doubt that’s a surprise.

Not only does the healthcare sector come with anti-cyclical demand and secular growth, but it also helps to improve the lives of countless people.

Before the Industrial Revolution, the median life expectancy in the world was roughly 30 years. Honestly, I did not expect it to be that low when I looked it up online. In more advanced nations, the life expectancy was roughly 35 years back then.

Now, the average life expectancy in advanced nations is in the high 70 range.

Needless to say, there are many factors at play here. Since the early 1900s, affordable energy has gone mainstream, our nations have become industrialized, agriculture has become efficient, and we now have cures for things that would have killed us a hundred years ago. This includes much lower infant mortality rates.

However, when it comes to investing in healthcare, there are many opportunities and many pitfalls.

Biotechnology companies come with patent loss and innovation risks, healthcare real estate comes with occupation risks, hospitals have razor-thin margins, and producers of medical supplies have high competition.

While I have found value in all of the sectors mentioned above, I’m very keen on one specific area: healthcare diagnostics and research.

That’s where Thermo Fisher comes in.

The giant, with more than $40 billion in revenue and 120 thousand employees, is one of the world’s largest life science and clinical research companies that sells laboratory equipment and supplies needed for biotech/pharma research.

In other words, the Waltham, Massachusetts-based corporation sells the equipment and supplies needed for biotech and related companies to do research, making it a critical player in global healthcare.

More than 80% of its sales are consumables, with more than 75% of its sales coming from developed markets in North America and Europe.

The company’s products allow it to “power the golden age of biotechnology,” support advanced precision medicine, and supply the necessary tools for research in advanced materials for the energy transition and digital economy (13% of its sales).

Fueled by its Practical Process Improvement (“PPI”) Business System to streamline operations and support the integration of acquired companies, Thermo Fisher has reported mindblowing growth, growing its revenues by 13% per year over the past ten years. Higher margins have turned this into 15% annual compounding earnings per share growth and 14% annual compounding free cash flow growth.

This included the pandemic, which was extremely bullish for TMO and its peers, as accelerated investments in research and high demand for testing caused revenues to fly.

Then, the pandemic faded. So did growth.

This caused the stock price to go sideways for more than two years and made putting a valuation on the stock very tricky.

However, before we dive into the valuation, let’s take a closer look at its just-released earnings, which showed very promising developments.

Thermo Fisher Is Back

In the second quarter of 2024, the company reported an adjusted EPS growth rate of 4% to $5.37.

Despite a slight decline in reported revenue of 1%, the company managed to outperform expectations, with core organic revenue growth slightly ahead by 0.5 percentage points, which translates to roughly $60 million in additional revenue.

As we can see below, total revenue growth was -1%, the number I just mentioned. There was no change from acquisitions. Currency translations were a 1% headwind. The same goes for COVID-19 testing revenues.

When adjusting for non-organic factors and COVID-19, core organic revenue was flat.

Obviously, erasing negative factors does not make the company look better.

We’re excluding COVID-19 headwinds because we knew these would be an issue after the pandemic. What matters is the strength of Thermo Fisher’s core business.

In the second quarter, it saw strong core growth, as the Analytical Instruments segment reported a 3% organic growth, driven by strong performance in the electron microscopy business. The Specialty Diagnostics segment saw a 1% increase in both reported and organic revenue, which was fueled by growth in transplant diagnostics and immunodiagnostics.

In order to remain competitive, the company is investing aggressively in R&D. Thermo Fisher spent roughly $340 million on R&D in 2Q24, 7.1% of its manufacturing revenue and 3.2% of its total revenue.

Over the past twelve months, R&D spending was 3.1% of total revenues, a new 10-year low. However, this does not make my other comments invalid, as aggressive revenue growth has more than offset spending growth in R&D, allowing the company to remain competitive with a relative (not outright) decline in R&D spending.

As a result, the company used the 2Q24 earnings call to explain that despite a decline in vaccine and therapy revenue, it managed to gain market share and deliver sequential growth across all four of its end markets.

According to the company, the biosciences and clinical research businesses led growth in the pharma and biotech sectors, while strong growth in electron microscopy boosted demand in the academic, government, industrial, and applied markets.

Meanwhile, in the diagnostics and healthcare sector, core revenue growth was driven by transplant diagnostics, immunodiagnostics, and the healthcare market channel.

With regard to R&D spending, the company launched new products, including the Thermo Scientific Stellar mass spectrometer and additions to the Thermo Scientific Orbitrap Ascend Tribrid mass spectrometer.

The company believes these advances not only support current demand but allow its tools to be used for future scientific breakthroughs as well, which is what this is all about.

Moreover, the company is expanding its footprint through new facilities in the Netherlands and Pennsylvania and partnerships in APAC nations, including with the National Battery Research Institute in Indonesia.

This also includes the acquisition of Olink, which was completed after the end of the second quarter in a $3.1 billion deal. Olink is a leader in proteomic solutions (the study of proteins). This is what TMO wrote when it announced the acquisition last year:

Olink offers leading solutions for advanced proteomics discovery and development, enabling biopharmaceutical companies and leading academic researchers to gain an understanding of disease at the protein level rapidly and efficiently. Olink’s proprietary technology, Proximity Extension Assay (PEA), provides high throughput protein analysis for the very large installed base of qPCR and next-generation sequencing readout systems in the market. With a library of more than 5,300 validated protein biomarker targets, adoption of the technology has been very strong, leading to over 1,400 scientific publications. Headquartered in Sweden, Olink has operations in the Americas, Europe and Asia Pacific. – Thermo Fisher Scientific

In general, the company is upbeat about its future, as it raised its full-year guidance, expecting revenue in the range of $42.4 billion to $43.3 billion and adjusted EPS between $21.29 and $22.07. The prior EPS guidance range was $21.29 to $22.07.

Shareholder Value

TMO is a dividend growth stock. It has a payout ratio of less than 7.0% and a five-year dividend CAGR of 15.5%.

That’s fantastic for dividend growth investors.

The bad news is that it yields just 0.3%.

In other words, a $10,000 investment in TMO gets you $30 in pre-tax dividends. That’s a single trip to a low-cost fast-food joint for 2-3 people – depending on where you live and how hungry you are.

The good news is that the yield is only low because capital gains in the past offset dividend growth. If you were to ask any long-term investors who are sitting on more than 400% in gains, I doubt they worry about the current dividend yield being low.

Moreover, the low payout ratio leaves a lot of room for aggressive M&A and R&D. Despite a number of big-ticket M&A deals, TMO has a balance sheet with a 2.3x 2024E leverage ratio and a credit rating of A-.

Needless to say, I understand it when investors dependent on income believe that TMO is wrong for them. While TMO is a dividend growth stock, the emphasis is on the “growth” part.

Regarding its valuation, we’re dealing with another issue.

• The pandemic caused both growth and the TMO stock price to explode.
• After the pandemic, growth declined.
• While the TMO stock price has gone sideways, it never became “cheap” because the market knew the decline in growth was temporary.
• Now, growth is accelerating again.

Using the FactSet data in the chart below, analysts expect EPS growth to accelerate from 1% in 2024 to 12% in 2026. Using its five-year normalized P/E ratio of 24.5x, we get a fair stock price of $660, 9% above the current price.

Although this suggests a subdued total return in the 2-3 years ahead, it’s important to acknowledge that TMO is likely about to return to pre-pandemic growth rates, where it consistently grew EPS in the low-to-mid double-digit range every year.

Since 2004, TMO has returned 16.7% per year!

Hence, I stick to what I wrote in my prior article:

Although I don’t expect to see these returns anytime soon, I have little doubt that this powerful business model is capable of elevated double-digit returns once we leave the slow post-pandemic years behind us.

That’s why my family keeps buying TMO.

This also means that TMO and DHR are the only stocks we’re buying that are not trading at clearly visible discounts. It’s a strategy that does not come without risks. However, given secular healthcare growth and the company’s fantastic business model, we believe TMO will be able to deliver elevated returns for many years to come.

Please note that I do not disclose a long position in TMO. As I briefly mentioned, I own DHR and do not benefit financially from the accounts that I indirectly manage. It’s all “pro bono.”

Takeaway

Thermo Fisher Scientific remains a top pick despite the tricky post-pandemic landscape. The company has a fantastic business model in healthcare diagnostics and research, with over 80% of its sales from consumables and strong growth driven by advanced precision medicine and biotechnology.

Meanwhile, recent earnings support the resilience of its core business, with promising developments in key segments. While TMO isn’t cheap, its consistent revenue growth, impressive historical returns, and strategic investments in R&D and acquisitions position it for continued success.

As a result, we continue to invest in TMO, confident in its ability to deliver long-term, elevated returns, even as it trades at a somewhat lofty valuation.

Pros & Cons

Pros:

• Solid Growth: TMO has shown impressive revenue growth of 13% annually over the past decade, with EPS and free cash flow compounding at 15% and 14% per year, respectively.
• Strong Business Model: With over 80% of sales from consumables and a significant presence in developed markets, TMO is a critical player in global healthcare, supporting biotech and pharma research.
• Future-Proof Investments: Aggressive R&D spending and strategic acquisitions, like the recent Olink takeover, provide TMO with innovation and growth opportunities.

Cons:

• High Valuation: Post-pandemic, TMO’s stock isn’t cheap, making it key that growth accelerates meaningfully in the years ahead.
• Low Dividend Yield: With a yield of just 0.3%, TMO isn’t ideal for income-focused investors despite its strong dividend growth rate.
• Competitive Risks: The healthcare sector is competitive and prone to disruptors – although I believe these risks are subdued for TMO.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of DHR either through stock ownership, options, or other derivatives. 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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Test Drive iREIT© on Alpha For FREE (for 2 Weeks)

Join iREIT on Alpha today to get the most in-depth research that includes REITs, mREITs, Preferreds, BDCs, MLPs, ETFs, and other income alternatives. 438 testimonials and most are 5 stars. Nothing to lose with our FREE 2-week trial.

And this offer includes a 2-Week FREE TRIAL plus Brad Thomas’ FREE book.

The post Thermo Fisher: A Dividend Investor’s Lab Partner For Growth And Stability appeared first on Up2info.com.

• Thermo Fisher Scientific is finally starting to show signs of growth after getting through the headwind of declining covid-related business.
• Growth sources include increased business in China, completion of the Olink deal, and an increase in the number of clinical trials.
• Financial model updates and valuation analysis suggest the stock is currently priced at fair value, making it a Hold for now.

Slow Progress Justifies Hold Rating

Thermo Fisher Scientific (NYSE:TMO) stock has done little since my last quarterly review, down about 2% including the bounce it got after reporting 2Q 2024 earnings. The downgrade to Hold in my last article has been a good call so far.

The thesis at that time was that Thermo’s long-term growth plans still looked feasible, despite headwinds from the declining covid-related business that supercharged the company in 2021 and 2022. This new growth had yet to emerge, but the valuation of the stock already priced it in.

Since then, Thermo Fisher has shown continued signs of gradual improvement. After a year and a half of declining sales, 2Q results showed only a 1% year-on-year organic decline and would have been flat excluding the decline in covid-related revenue. The rate of improvement has varied across Thermo’s different segments. Life Sciences Solutions and Specialty Diagnostics have been improving since early 2023, while Analytical Instruments and Lab Products and Services appear to have bottomed in the last quarter or two. Lab Products and Services is the last segment to have significant pandemic-related sales, with its bioproduction facilities used in vaccine and treatment production. The other segments, more focused on viral research and testing, saw their covid-related revenue tail off earlier.

This slow improvement is reflected in Thermo Fisher’s guidance update for the full year 2024. The company raised its sales outlook to $43.4-$44.3 billion, up only 0.1% at the midpoint. EPS guidance increased to $21.29-$22.07, up just 0.5%.

The 2024 guidance is less optimistic than Thermo’s long-term targets, which has the company growing sales at 7%-9% per year. This is 3 percentage points better than their 4%-6% expectation for overall market growth. EPS growth would then be in the low double-digit range, considering margin improvements and share buybacks. While this is a big reach from the microscopic growth in 2024, some growth drivers are now coming into better view. Nevertheless, the stock valuation still suggests this growth is already priced in.

Emerging Growth Sources

Last quarter, I touched briefly on China as a re-emerging growth driver for Thermo. Since then, the country has released a 5-year plan that focuses on “High-Quality Growth“, as opposed to debt-driven, environmentally unsustainable development pursued in the past. China’s government media outlet described the stimulus program to achieve high-quality growth in this way:

During this year’s “two sessions,” Chinese Premier Li Qiang announced a projection of around 5 percent growth for China’s economy for 2024, highlighting the government’s focus on moderate yet high-quality growth.

To achieve it, China will launch a year-long program to stimulate consumption; launch policies to promote digital, environmentally friendly and health-related consumption; increase effective investment; modernize the industrial system; and develop new quality productive forces faster.

Thermo’s core market of healthcare research is clearly stated as a stimulus target. Other markets, such as sample analysis for environmental quality monitoring and electron microscopy to support chip manufacturing are also supported by Thermo’s products, mainly within the Analytical Instruments segment.

Both the national and provincial governments have been documenting their high-quality growth targets, and Chinese companies and institutions are beginning the process of applying for subsidies under these programs, according to Thermo management on the earnings call. While this is expected to impact Thermo sales in 2025, it is encouraging that China is already leading the world in terms of reported sales growth for Thermo in 2Q 2024. Growth was “mid-single digits” in China, as opposed to up low single digits in Europe and down slightly in North America.

Thermo will also see inorganic growth in the second half as the $3.1 billion acquisition of Olink has now closed. As I noted in a previous article, this deal does not impact short-term results significantly, with just $200 million of sales on a standalone basis in 2024. Olink will be part of Thermo’s Life Sciences segment with its focus on proteomics, or the qualitative and quantitative analysis of proteins. Longer-term, there are clear synergies across different parts of Thermo Fisher. Olink makes assays and software for analyzing proteins. These are run on Orbitrap mass spectrometers, which are a key product in Thermo’s Analytical Instruments segment. Olink also offers analysis services to customers who don’t own the equipment themselves, a complement to Thermo’s Lab Products and Services segment.

The pace of new clinical trial authorizations has picked up, according to Thermo Fisher management on the earnings call. This is confirmed by data from the National Institutes of Health on clinicaltrials.gov. In the immediate post-pandemic environment, new clinical trial registrations increased slowly, from 36,722 in 2020 to 39,721 in 2023. So far, in 2024, however, there have been 25,572 new clinical trials registered through 7/24. This works out to a full-year pace of 45,500 new trials.

Finally, the headwind from declining pandemic-related sales is nearing its end. The current pace of these sales is down to $400 million per year, $100 million for diagnostic testing and $300 million for vaccine and therapy contract manufacturing. This amounts to just 1% of Thermo’s annual revenue. As we saw in the table above, the Specialty Diagnostics segment has returned to growth, with good demand for transplant and immunological diagnostics. The Laboratory Products and Services segment is the last to see the unwinding of the pandemic business, but management noted on the call that there is demand in other areas for the capacity that was being used for vaccine fill and finish operations. Margin expansion is also possible from these new customers.

Financial Model Update

I made only minor changes to my model since last quarter. Sales are lower by about $100 million and SG&A higher by $150 million, but cost of goods is down $400 million as we have seen improved gross margins so far in 2024. This works out to an EPS estimate of $21.68 for 2024, in line with company guidance. For 2025, my EPS estimate is $24.45, down just $0.08 from last quarter’s model due to higher SG&A, extending the increase we have seen so far in 2024. The organic sales growth assumption for 2025 is 7%, the low end of Thermo’s long-term target. My 2025 estimate is about 1% above the analyst consensus at the time of writing.

Valuation

My DCF analysis has also changed only slightly. For 2026-2028, I am using analyst consensus estimates for earnings, which are down around 1% from last quarter. I am using the same assumptions of 5 million shares per year buyback and 80% free cash flow conversion to get my FCF estimates. Terminal growth rate and WACC are also unchanged.

The resulting DCF valuation is $577.58 per share, down from $582.68 last quarter. This is only 1-2% below where the stock was trading on the day of the earnings release, making it a Hold.

Capital Management

Thermo Fisher’s overall debt profile did not change in 2Q. $700 million of long-term debt rolled into short-term, as it is now within 1 year of maturity. Thermo ended the quarter with debt/EBITDA leverage of 3.3x gross, or 2.5x net. The company had a cash and investments balance of $8.8 billion at quarter-end, but $3.1 billion of that has since been spent on the Olink acquisition.

I do not consider this level of debt a problem at all. Interest coverage (operating income / net interest expense) has been 24x year-to-date. A lot of Thermo’s debt has been in the form of euro-denominated bonds at very low interest rates in the 0%-2% range. Still, Thermo’s interest coverage will decrease with lower interest income as the cash previously set aside for the Olink deal has been spent. Also, the $1.5 billion due in March and April 2025 was in the form of these low-interest euro bonds. The company would likely face higher interest rates if it tries to refinance this debt. I would like to see the company focus on paying this down in 2025 rather than expanding buybacks or dividends.

Starting from my FCF estimate of $6.6 billion for 2024, Thermo used $3.1 billion on the Olink deal, $3 billion on share buybacks, and will spend a total of $0.6 billion on dividends. That leaves nothing for debt reduction in 2024, but in the absence of a big acquisition next year, I expect Thermo to pay off the debt currently classified as short term, plus another $0.7 billion coming due in the second half of 2025.

Conclusion

Thermo Fisher is still on target for flat sales and earnings in 2024, but growth drivers are emerging with China, Olink, increasing clinical trials, and contract manufacturing demand to replace declining vaccine business. These will go a long way toward getting back on track to Thermo’s 7-9% long-term sales growth target. Nevertheless, at $570, the stock has a P/E of 26.3, which is at the high end of what I like to see for a stock with EPS growing around 13% per year. The DCF analysis update similarly suggests that the stock is currently only 1-2% below fair value. Thermo Fisher has been a successful and disciplined grower that can appreciate over the long term but for now the stock remains a Hold due to valuation.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of TMO either through stock ownership, options, or other derivatives. 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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Thermo Fisher Scientific: Microscopic Signs Of Growth Emerging appeared first on Up2info.com.

• Thermo Fisher Scientific is well-positioned to benefit from the demand for innovation in the healthcare and biotech sectors.
• The company’s strategic acquisitions have improved its growth capabilities and deepened its relationships with biopharma partners.
• Despite a low dividend yield, TMO has a history of strong total returns and consistent dividend growth, making it a compelling long-term investment.

Introduction

On April 24, I wrote an article covering Alexandria Real Estate Equities (ARE), a REIT that owns healthcare real estate, including laboratories.

This REIT is on my radar as a fantastic way to benefit from innovation in healthcare without having to figure out which biotech company will reveal a groundbreaking drug next.

[…] the company has provided the facilities that allowed for groundbreaking research, as the company noted that roughly half of all FDA-approved therapies over the past ten years were attributed to its tenants.

Buying real estate also protects investors against the current period of elevated patent losses among the big pharma companies.

In February, The Healthcare Technology Report wrote that the top 20 biopharma companies collectively face a $180 billion revenue patent cliff through 2028!

While this comes with risks, there are many ways to benefit from the related urge for innovation in this industry.

• Real estate: Alexandria has certainly found a way to benefit from this by leasing to some of the most stable tenants in the world. However, this somewhat limits the upside potential.
• Biotech companies: Finding attractive biotech companies with strong blockbuster drugs on the market or in their pipeline can be highly beneficial.
• Suppliers.

Point three is why I’m writing this article.

As I have a background in supply chains, I love companies that benefit from growth in a certain industry without massive competition, as they can supply a wide range of customers.

That’s where Thermo Fisher Scientific (NYSE:TMO) comes in.

Thermo Fisher is a holding of some family accounts and a competitor of the Danaher Corporation (DHR), which is a highly correlated company I bought a few years ago.

My most recent article on this fascinating dividend growth compounder was published on February 6, when I went with the title “Thermo Fisher’s Bright Future Makes It A Great Buy On Weakness.”

Since then, the stock has returned 3%, lagging the S&P 500’s 8% return.

Over the past ten years, TMO’s 400% total return beats the S&P 500 by roughly 170 points.

In this article, I’ll revisit my bull case and explain why I believe this company is in a terrific position to exploit strong tailwinds in the healthcare/biotech sector.

I also believe it continues to be a great dividend growth stock despite its low yield and what some may consider to be a lofty post-pandemic valuation.

So, as we have a lot to discuss, let’s get to it!

Buying Healthcare Innovation

I have often written in articles that I’m fascinated by healthcare innovation.

It’s truly fascinating to see how blockbuster drugs can fight serious illnesses and significantly improve the lives of many people.

However, picking healthcare winners isn’t easy, as it comes with a load of uncertainty, including regulatory approval risks, competition, funding risks, and others.

While I invest in biotech companies – I own AbbVie (ABBV) and have others on my watch list – I am a big fan of buying suppliers.

Although these companies also come with competition, they are often in a great spot to benefit from the general need for innovation in healthcare, as it increases demand for equipment and related supplies.

Headquartered in Waltham, MA, Thermo Fisher supplies a wide range of customers, including pharmaceutical and biotech companies, hospitals, clinical diagnostic labs, universities, research institutions, and others.

It sells through brands like Thermo Scientific, Applied Biosystems, Invitrogen, Fisher Scientific, Unity Lab Services, Patheon, and PPD.

As we can see below, the company sells its products through four major multi-billion dollar segments that each target a specific area of the healthcare/biotech sector, including Life Sciences, Specialty Diagnostics, Analytical Instruments, Laboratory Products, and Biopharma Services.

Putting all things together, almost 60% of its revenue comes from the pharmaceutical and biotech sectors, which are expected to grow between 4% and 6% annually.

These numbers used to be 3-5%.

However, because the company made internal changes with a bigger focus on growth markets, it now sees consistently higher growth.

During the Bank of America Health Care conference last month, the company explained that strategic M&A has played a major role in growing at a faster clip.

This includes PPD and Patheon, which have significantly improved the company’s service offerings and deepened its relationships with biopharma partners.

According to the company, these acquisitions have broadened its capabilities and positioned it as a trusted partner in the development and manufacturing processes for pharmaceutical companies.

Adding to that, the company believes its exposure to China is a huge benefit.

Last year, 18% of its revenue was generated in the APAC region.

Despite the economic slowdown in China in 2023, the company expects to benefit from the Chinese government’s multiyear fiscal stimulus program focused on capital equipment.

This program is expected to have a positive impact on the Analytical Instruments segment.

While China comes with post-pandemic weakness, the company expects revenue benefits to materialize in late 2024 and into 2025, which is great news for the entire industry, in my opinion.

Furthermore, the company’s focus on high-end research and cutting-edge technologies, including the Thermo Scientific Orbitrap Astral mass spectrometer, positions it well to capture growth in what has become a rapidly evolving life sciences sector.

The Orbitrap Astral Mass Spectrometer achieves this by analyzing samples in just 8 minutes injection-to-injection, allowing acquisition of 180 samples per day. Each injection can identify 8,000+ proteins in a standard cell lysate sample, breaking through the bottleneck of sample analysis. This faster throughput enables the analysis of over 1.4 million cumulative protein group measurements across 180 samples in a single day, meaning a single Orbitrap Astral Mass Spectrometer can measure tens of thousands of samples in a year. – Thermo Fisher

As good as all of this sounds, what does this mean for shareholders?

Not Cheap, But Far From Expensive

Thanks to a strong performance and demand recovery, TMO hiked its guidance in the first quarter, as it now expects to generate at least $42.3 billion in revenue.

This is expected to lead to an EPS range of $21.14 to $22.02.

During its 1Q24 earnings call, the company also announced strategic partnerships, including its partnership with German healthcare giant Bayer to develop a next-generation sequencing-based companion.

This bodes well for shareholders.

In the first quarter, Thermo Fisher repurchased $3 billion of shares and increased its dividend by 11.4%.

Currently, it pays $1.56 per share per quarter, which gives us a yield of 0.3%.

0.3% is not a lot. A $10,000 investment will get you $30 in pre-tax dividends. That’s two trips to the fast-food chain with the big yellow “M” – for one person.

However, please keep a few things in mind.

It’s not TMO’s fault that its dividend yield is so low.

The five-year CAGR is 15.5%!

Its yield is low because capital gains offset dividend growth, which explains why it has such a fantastic total return.

Obviously, if you require dividend income, TMO is wrong for you.

Everyone else, however, may still benefit from buying low-yield dividend growers.

That said, using the FactSet data in the chart below, analysts agree with the company. After a few challenging post-pandemic years, EPS growth this year is expected to be 1%.

In 2025 and 2026, EPS growth is expected to be 12% and 11%, respectively.

Currently, TMO trades at a blended P/E ratio of 26.6x. This is a bit above its five-year normalized P/E ratio of 24.5x and way above the two-decade normalized P/E ratio of 20.1x (the blue line in the chart above).

The reason why TMO isn’t selling off is that investors know there’s a path to consistent double-digit annual EPS growth, fueled by mid-to-high single-digit revenue growth.

Everyone knew the post-pandemic years would be challenging. Selling into expected weakness is not something investors will do when the favorable longer-term outlook keeps getting confirmed.

While the company’s returns could remain subdued in the next 1-2 years, I still expect mid-single-digit to high-single-digit annual returns.

Since 2004, TMO has returned 16.7% per year!

Although I don’t expect to see these returns anytime soon, I have little doubt that this powerful business model is capable of elevated double-digit returns once we leave the slow post-pandemic years behind us.

That’s why my family keeps buying TMO.

The only reason I don’t own it is my investment in DHR. I like both and have no favorite.

Takeaway

Thermo Fisher Scientific is a fascinating company in the healthcare and biotech sectors, which consistently benefits from the industry’s demand for innovation.

Despite a low 0.3% dividend yield, TMO’s strong organic growth and strategic acquisitions have driven impressive total returns.

Given a favorable growth outlook, TMO remains a compelling investment for those seeking long-term growth rather than elevated income.

While the post-pandemic period presents challenges, the company’s strategic positioning and partnerships make sure it remains a key player in healthcare innovation, with what, I believe, is a very promising future.

Pros & Cons

Pros:

• Strong Growth Potential: TMO is well-positioned to exploit significant tailwinds in the healthcare and biotech sectors.
• Strategic Acquisitions: Past acquisitions like PPD and Patheon improve TMO’s growth capabilities.
• Innovative Edge: Cutting-edge technologies allow the company to stay on top of the latest trends.
• Long-Term Returns: TMO has a history of spectacular total returns and consistent dividend growth, which I expect to last.

Cons:

• Low Dividend Yield: At just 0.3%, the dividend yield is nothing to write home about.
• Valuation: Trading at a blended P/E ratio of 26.6x, TMO is slightly overvalued, which means it needs to deliver on its guidance (no room for error).
• Short-Term Challenges: The post-pandemic recovery phase may pressure returns in the next 1-2 years, potentially limiting short-term gains.
• China Exposure: Dependence on the Chinese market comes with some risks, including political and cyclical post-pandemic risks.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of DHR either through stock ownership, options, or other derivatives. 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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Test Drive iREIT© on Alpha For FREE (for 2 Weeks)

Join iREIT on Alpha today to get the most in-depth research that includes REITs, mREITs, Preferreds, BDCs, MLPs, ETFs, and other income alternatives. 438 testimonials and most are 5 stars. Nothing to lose with our FREE 2-week trial.

And this offer includes a 2-Week FREE TRIAL plus Brad Thomas’ FREE book.

The post Low Yield, High Growth: Unveiling The Power Of Thermo Fisher’s Dividends appeared first on Up2info.com.