Summary
- Thermo Fisher continues to see a steady operating performance.
- A fair valuation has over time built up into a premium valuation at nearly 25 times earnings.
- While I recognise the quality of exposure to growing end-markets and savvy dealmaking, shares trade at too rich a multiple to actively chase.
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Thermo Fisher (TMO) continues to be a great long-term value compounder, driven by a very well-balanced combination of organic growth and M&A. Upon request of readers, I am looking at the shares again, as the latest write-up has been two years ago already. At the time, I looked at the shares following the purchase of Patheon in a +$7 billion deal.
Ever since, shares have nearly doubled, as the advancement in the share price has considerably outrun the improvement in the operational performance, so much so that the current premium valuation prevents me from being attracted to the shares at these levels.
The Business - An Overview
Savvy positioning, both in an organic and inorganic manner, has transformed Thermo Fisher into a $25 billion scientific platform which is active across four large business segments. The largest segment is the laboratory products and service business, making up nearly 40% of sales, although this is the segment with the lowest margins across the portfolio. This is complemented by Life Science Solutions and Analytical Instruments, each making up more than 20% of sales, complemented by the smaller Specialty Diagnostics segment. These three smaller units are considerably more profitable, however.
Note that a huge portion of the revenue base is recurring, with half of sales generated from so-called consumables, with services responsible for nearly a quarter of revenues as well. While the company has a huge presence in North America, being responsible for half of sales, Thermo Fisher has a large presence in both Europe and Asia as well, both making up nearly a quarter of sales.
Each of these segments has healthy growth prospects on the back of favourable demographic trends (ageing of population causing more chronic diseases, as well as rising wealth levels across the globe). Other trends include scientific advances, technology migration and a focus on healthcare. This great positioning is the reason why the company upped the long-term organic growth target by a point to 5-7% per annum, creating very strong tailwinds for the business, of course.
With revenues now totalling $25 billion, it is very clear that the merger between Thermo Electron and Fisher Scientific, which took place in 2006 with pro forma revenues of $10 billion, has laid the foundation for the great value-enhancing strategy ever since.
