Thermo Fisher Scientific: On the Road to Discovery (NYSE:TMO)

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Actions of ThermoFisher Scientific (NYSE: TMO) They have also come under pressure, as part of a group of high-value companies hurting from the impact of higher interest rates.

After the stock hit a high of $670 earlier this year, the stock is down to the $500 mark, as the pullback is fairly modest relative to many other stocks, with shares still trading well above pre-pandemic levels.

Back to 2019

In the summer of 2019, I took one last look at Thermo Fisher stock, calling it a consistent performer whose performance came at a cost, that of a high valuation. At the time, Thermo Fisher was a $25 billion scientific powerhouse, organized into four products. The largest segment was laboratory products and service products, responsible for approximately 40% of sales. This was supplemented by scientific solutions and an analytical instrument group, each responsible for approximately 20% of sales, as the company also had a smaller specialty diagnostics segment.

The company derived half of its sales from North America and a similar percentage from consumables, but the company was (and still is) quite diversified in terms of geographic activities and the division between sales of equipment and consumables. With a revenue base of about $25 billion at the time, the company earned about $11 per share (on an adjusted basis), as the adjustment seemed fair enough.

The $17 billion net debt translated into a leverage ratio of 2.8 times and with 405 million shares trading at $300 at the time, an equity valuation of $121 billion and a company valuation of $138 billion. million, reduced to a 5.5 times multiple of sales and approximately 27 times multiple of earnings. With growth evident throughout 2019, there was a real roadmap for earnings to grow to $12 per share, which still translated to a 25x earnings multiple premium, a bit too high for me at that moment.

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What happened?

Fast-forward more than three years to the summer of 2019, when stocks were trading around the $300 mark, we saw stocks rise to the $500 mark in late 2020, the first year of the pandemic. After rising to a high of $670, partly fueled by low interest rates, the stock is now down to $500 a share.

This year began with the completion of a $1.85 billion deal for PeproTech, a transaction Announced at the end of 2021. A few weeks later, the company announced its results for 2021, a very successful year in which sales increased 22% to $39.2 billion, with significant EBITDA reported of 12.5 billion dollars.

Part of this rapid growth came as the company announced a massive $21 billion PPD deal. While sales had increased more than 50% from where they were in 2019, earnings per share had nearly doubled with adjusted earnings reported at $25 per share. The deal came at a cost, increasing net debt to $30bn, however with EBITDA slowly rising to $12.5bn this leverage ratio is still very manageable.

Until 2022 the company aware strong results with double-digit growth recorded in each of the first three quarters of the year. This means revenue rose 17% to $33.5 billion in the first nine months of the year, at a run rate of around $45 billion. That’s the good news, as adjusted earnings per share so far lags about seventy cents compared to last year’s year-to-date earnings performance, reported at $17.84 per share.

Part of this lower earnings boost came from the pullback in Covid-19 testing revenue, as the growth was fueled by last summer’s PPD deal, of course. Strong cash flow generation caused net debt to drop to $26bn and flip, mainly because no big deals were seen this year and dividends are pretty modest.

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With nearly 400 million shares trading at $500 a share, Thermo Fisher has an equity valuation of roughly $200 billion here, a number that rises to $226 billion if we factor in net debt. This still comes down to about 5x sales and with earnings trending at $24 per share, valuations are reasonable at 20-21x earnings.

An extra deal

On the last day of October, Thermo Fisher again announced an additional agreement. The company has reached an agreement to acquire specialist diagnostics firm The Binding Site Group, a UK-based firm in a $2.6 billion deal, equal to about one percent of the company’s valuation.

The company is poised to add $220 million in revenue, growing around 10% annually, revealing that it has paid for itself a rather expensive sales multiple of 12 times. With adjusted earnings set to rise seven cents a share at the close, that reveals an after-tax earnings contribution of $35 million. You are not sure if the company calculates this accrual before financing costs or after.

concluding remark

At this point, the overall valuation has already dropped a lot. A 20x earnings multiple translates to a 5% earnings yield, at par or just above risk-free rates, yet Thermo Fisher offers stability and attractiveness with earnings growth. Right now, the business is in something of a transition year amid the withdrawal of pandemic-related revenue, but the long-term outlook remains good.

The latest add-on deal seems a bit pricey, but Thermo Fisher has a great track record of creating deals. Given all of this, I’m getting bullish here, although a lot of names are selling in this environment. Given all of this, stocks are slowly coming up on my radar as any pullback to the mid-$400s will be used to start starting a position here on the dips.

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