Thermo Fisher Stock: Strong Foundation for Growth (NYSE:TMO) – Seeking Alpha | Vette Leader

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investment work

Thermo Fisher Scientific (NYSE:TMO) is a global leader in the manufacture of scientific equipment, instruments, diagnostic products and related services. The company offers a great combination of stability and growth and has a highly complementary and affordable product mix Sales profiles in multiple markets that ensure future growth. Thermo Fisher has long been a terrific investment option, and I think it will remain so for a while. Below are the main reasons:

  • All of Thermo Fisher’s segments are growing steadily, and overall growth will remain strong despite falling revenue from COVID-related products.
  • Thermo Fisher’s ability to generate cash is impressive and looks solid for the future.
  • High profit margins illustrate a strong economic moat, operational efficiency and growth quality.

Strong performance in all segments

Since my previous article, Thermo Fisher has reported Q2 2022 results and once again posted great gains. Total revenue increased 18% year over year, with a strong performance across all segments. Pharmaceuticals and biotech delivered mid-teens growth, science and government grew in the mid-single digits, and industrials and applied industries grew in the low double-digits. These are excellent given the challenges COVID lockdowns, supply chain issues and cost control.

Several new products were launched earlier this year and are already fueling Thermo Fisher’s growth. An automated sample preparation platform (AccelerOme), Thermo Scientific Direct Mass Technology mode for its mass spectrometers, and a cloud-based software platform (Thermo Scientific RDO) help customers achieve greater efficiencies in their research and operational environments. The most exciting part of the results was the big rise in the services segment. Three-month service revenue nearly doubled from $2.0 billion to $4.0 billion. Because the service segment is a higher-margin business, this will continue to improve Thermo Fisher’s profit margin going forward.

Disaggregated Revenue

Disaggregated Revenue (SEC filings)

Strong operating cash flow

Thermo Fisher has always been great at generating operating cash flow, but they’ve taken this to the next level in recent years. Operating cash flow was $2.0 billion in 2012 and increased to $8.8 billion over the trailing twelve months. With the aforementioned steady organic growth and inorganic growth (e.g. recent PPD acquisition), Thermo Fisher will continue to grow and operating cash flow will continue to grow.

I expect strong synergies in particular from the PPD acquisition. PPD is the global industry leader in providing services to pharmaceutical and healthcare companies. They accelerate the drug and medical device development process by providing clients with tailored clinical development strategies and analytical services. For example, Thermo Fisher supported Moderna’s development of the Spikevax COVID vaccine, and the two companies decided in February to extend that collaboration across Moderna’s pipeline. By combining this impressive service capability with impressive life science product lines, I am confident that Thermo Fisher can now offer its customers and partners the total package.

Strong profit margins

Thermo Fisher has a very robust economic competitive advantage gained through technological superiority, switching costs and brand awareness. Also, their management does an excellent job of running the manufacturing facility and managing the supply chain efficiently. A strong economic moat and quality management decisions are demonstrated by high profitability ratios.

The high profit margins (EBIT, EBITDA and net profit margins) represent a strong economic moat. Thermo Fisher is able to charge a premium for its products because they offer better products with advanced technology and strong brand awareness. At the same time, the high returns on equity and capital demonstrate the production efficiency and effective supply chain management. I expect that they will continue to maintain these quality standards in the future.

profitability ratio

profitability ratio (search alpha)

Estimation of the intrinsic value

I used the DCF model to estimate intrinsic value. For the estimate, I used EBITDA ($12.7 billion) as a cash flow proxy and the current WACC of 8.0% as the discount rate. For the base case, I’ve assumed 17% EBITDA growth (5-year average revenue growth) over the next 5 years and no growth (no terminal growth) thereafter. For the bullish and very bullish case, I have assumed 19% and 21% EBITDA growth respectively for the next 5 years and no growth thereafter.

The estimate showed that the current share price represents upside potential of 20-25%. Their organic growth, resulting from strong R&D efforts, and inorganic growth, resulting from acquisitions, will keep Thermo Fisher growing and I expect they will deliver on that uptrend.

price target

On the top

base case

$672.88 12%

bullish case

$724.63 20%

Very bullish case

$779.78 30%

The assumptions and data used for the price target estimate are summarized below:

  • WACC: 8.0%
  • EBITDA growth rate: 17% (base case), 19% (bullish case), 21% (very bullish case)
  • Current EBITDA: $12.7 billion
  • Current share price: $596.83 (08/15/2022)
  • Tax rate: 20%

Cappuccino Stock Rating

weighting TMO
Economic moat strength 30% 5
financial strength 30% 4
Growth Rate vs. Industry fifteen% 4
margin of safety fifteen% 4
Industry Outlook 10% 4
In total 4.3

economic moat

Thermo Fisher has a very strong moat to protect its market share. They are technologically advanced and have strong brand awareness. Also, customers could incur significant switching costs if they switched to a different line of devices, and this helps keep existing customers coming back. A strong R&D effort and major acquisitions will keep this moat nice and wide.

financial strength

Thermo Fisher recently took on a large amount of long-term debt to acquire PPD. However, they have excellent operational cash generation ability and their profit margins are very high. Also, her current ratio and quick ratio are well in the range of peers.

growth rate

Thermo Fisher’s core business will continue to grow strongly in the future. I believe that the PPD acquisition is a great step and will bring synergies in the future. However, some of their revenue growth will be offset by falling COVID-related revenue.

margin of safety

Thermo Fisher’s stock price is 20-25% undervalued, giving investors a nice cushion. However, due to recent market volatility, some tech and growth stocks are still 40-50% below intrinsic value, making it difficult to justify Thermo Fisher’s top rating at this point.

Industry Outlook

As R&D efforts by pharmaceutical companies, research institutes, governments and academia continue to increase, demand for Thermo Fisher products and services will increase accordingly. Thermo Fisher’s growth goes hand-in-hand with evolving healthcare needs.

risk

While not at a worrying level, investors should keep an eye on the large long-term debt that has accumulated in recent years. Total debt of $30 billion is certainly high compared to peers and the company’s historical levels. Its total debt to equity ratio (71%) is also on the high end compared to its peers. As such, the investor should closely monitor Thermo Fisher’s debt management going forward.

Thermo Fisher’s consumables segment will see a decline in sales COVID-related products are falling. Due to the unpredictability of the pandemic and emerging variants, it’s difficult to estimate how quickly this revenue could decline. Therefore, this leads to some uncertainty in the COVID related product sales and will make the stock more volatile until we have a better idea of ​​the upcoming sales profile.

Conclusion

Thermo Fisher has been a terrific investment choice for investors for a number of decades, and I don’t see any sign of that changing anytime soon. The company has excellent product lines based on advanced technology and strong R&D team to drive organic growth. In addition, TMO is not afraid to acquire key companies. The company’s large debt and fluctuations associated with unpredictability The COVID earnings bring some uncertainty, but overall I expect 20-25% upside potential going forward.

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