Thermo Fisher Offers Growth, Value

10/22/2012


  Recent Price
$60
  Dividend
$0.52
  Yield
0.9%
  P/E Ratio
13
  Shares (millions)
369
  Long-Term Debt as % of Capital
28%
  52-Week Price Range
$61.72 - $43.06

Thermo Fisher Scientific ($60; TMO) sells many items used in laboratories: instruments, equipment, flasks, solvents, and analytical software. It also offers specialized diagnostic tests, such as checking the compatibility of organ donors for transplant centers.

Both academic and government research budgets, which account for 25% of Thermo Fisher's sales, remain under pressure. But the stock, trading at 13 times trailing earnings, 41% below its five-year average, already reflects plenty of pessimism.

Looking ahead, the shares trade at less than 13 times estimated earnings for 2012, 25% below the median for life sciences tools and services companies in the S&P 1500 Index. Yet Thermo Fisher is projected to increase profits 4% this year, ahead of the median 1% gain for its peer group. The company anticipates at least 10% higher earnings in 2013 and double digit-growth through 2016, and the consensus concurs. Thermo Fisher is a Buy and a Long-Term Buy.

Business breakdown

In the first half of 2012, 11% sales growth and fatter profit margins contributed to a 30% surge in cash flow from operations. Three acquisitions made over the past 18 months at a combined cost of roughly $6.5 billion drove most of that growth, especially in the diagnostics and analytical-technologies segments.

First-half sales of analytical technologies (31% of sales in the first half of 2012, 31% of income) rose 14%, while the more-profitable specialty diagnostics unit (23%, 33%) increased sales 28%. Income from specialty diagnostics rose 39%, and the recent deals have pushed Thermo Fisher into higher-margin businesses.

Thermo Fisher's largest unit, laboratory products and services (46%, 36%), provides equipment, consumables (such as disposable vials, microscope slides, and syringes), and research services. Sales rose 3% in the six months ended June.

Thermo Fisher generates more than half of its sales in the U.S., a higher proportion than many of its peers. But the company has earmarked 15% to 20% of 2012 capital spending to emerging markets, including China (5% of 2011 sales).

Conclusion

Thermo Fisher anticipates free cash flow of $1.50 billion to $1.55 billion this year, implying growth of 5% to 9%. Management has set a goal of returning half of free cash flow to shareholders through stock buybacks and dividends but could return more than 80% this year. In April, the company paid its first dividend in more than 10 years, a quarterly distribution of $0.13 per share. And it plans to repurchase $750 million in shares over the second half of 2012 on top of $400 million spent in the first half. Buybacks have reduced the share count by 16% since June 2008.

Set to post September-quarter results on Oct. 24, Thermo Fisher is projected to earn $1.17 per share, up 18%, on 1% sales growth. Thermo Fisher has been good at managing expectations, last missing a consensus profit estimate in the March 2009 quarter. An annual report for Thermo Fisher Scientific Inc. is available at 81 Wyman St., Waltham, MA 02454; (781) 622-1000; www.thermofisher.com.

THERMO FISHER SCIENTIFIC
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Jun '12
1.22
vs.
0.99
+ 9%
56.91
-
48.14
13 - 11
Mar '12
1.17
vs.
0.92
+ 14%
58.37
-
45.67
14 - 11
Dec '11
1.18
vs.
0.96
+ 15%
55.26
-
43.06
14 - 11
Sep '11
1.07
vs.
0.87
+ 13%
65.68
-
48.78
18 - 13
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
11.73
4.16
0.00
65.86
-
43.06
16 - 10
2010
10.79
3.46
0.00
57.40
-
41.74
17 - 12
2009
10.11
3.05
0.00
49.70
-
30.83
16 - 10
2008
10.50
3.13
0.00
62.77
-
26.65
20 - 9
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
91
67
75
75
52
96
63

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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