In November of last year I believed that shares of Thermo Fisher Scientific (NYSE:TMO) were on the road to discovery, delivering on impressive results even as pandemic-related revenues were seeing a pullback, on top of which a strong dollar turned out to be a headwind as well.
With earnings multiples down to 20 times, that looked appealing given the quality of the business, although that higher interest rates created some competition for higher valued stocks.
Creating Some Perspective
Pre-pandemic, Thermo Fisher was a $25 billion scientific powerhouse which was comprised out of laboratory products and services products, science solutions and analytical instruments, as well as specialty diagnostics.
About half of sales were generated in North America, and a similar percentage from consumables, as the business felt really balanced and diversified, with the business posting earnings around $11 per share. Net debt of $17 billion worked down to a near 3 times leverage ratio, a bit high but perfectly fine given the growth and predictability of the business. With 405 million shares trading at $300 at the time, a resulting $138 billion enterprise valuation made that the business was valued at 5.5 times sales and 27 times earnings, lofty valuations.
The pandemic created an uplift in the financial performance and expectations, as shares peaked around $670 by the very end of 2021, before trading stagnant and actually coming down to the $500 mark in November 2022.
Besides the impact of the pandemic, it was M&A efforts which boosted the business as well, including a $21 billion deal for PPD, as well as numerous smaller additions. By November of last year, the company has posted results for the first three quarters of 2022, with sales up 17% to $33.5 billion, for a run rate of $45 billion. Adjusted earnings were falling short a little a bit compared to the same time frame in 2021, when they came in at $17.84 per share for the nine-month period.
The 400 million shares traded at $500, for a $200 billion equity valuation, and $226 billion enterprise valuation. Trading at 5 time sales and with earnings trending at $24 per share, appeal was improving a lot, with the earnings multiple compressing to 20 times. To ignite some further enthusiasm, Thermo announced a $2.6 billion deal to acquired UK-based Binding Site Group, in a rather bolt-on deal which is set to add to $220 million in revenues, hardly making a dent to the investment case.
Not Coming Down
Having concluded that I was willing to initiate a position in the mid $400s late in 2022, shares have traded in a $500-$600 range ever since, now trading hands at $517 per share. This means that I have not considered taking a position in the company, and thus still do not hold any shares.
In February the company announced its 2022 results with revenues up 15% to $44.9 billion and adjusted earnings reported at $23.24 per share, down nearly two dollars from the year before with pandemic related (and very profitable) revenues falling, although that lapsing of this effect was really visible in the fourth quarter of the year.
The company outlined a flattish guidance for 2023 with revenues seen at $45.3 billion and earnings seen at $23.70 per share without exactly quantifying how much of the growth is driven by the organic business, offset by pandemic related revenues falling further.
Traditionally not a big dividend payer, Thermo announced a 17% hike in the quarterly dividend, hiking the payout by five cents to $0.35 per share in February.
In April, Thermo Fisher posted a 9% fall in first quarter sales to $10.71 billion, although that the company announced core organic growth of 6%. Amidst GAAP operating profits being down ten percent to 14% of sales, the company has seen GAAP earnings per share fall from $5.61 per share to $3.32 per share, with adjusted earnings down just over two dollars to $5.03 per share. This felt a bit soft, but the retreat of pandemic related revenues should be less visible in the coming quarters.
The vast majority of the difference relates to amortization charges, which I am happy to adjust for. Net debt inched up to nearly $32 billion, mostly the result of The Binding Site deal, which closed. The 388 million shares value equity of the company at $200 billion at $513 per share, for a $232 billion enterprise value.
To further ignite some growth, Thermo Fisher announced its next bolt-on deal in July. Thermo has reached a $912 million deal (equivalent to 0.4% of its own enterprise valuation) to acquire CorEvitas, a provider of regulatory-grade evince for approved medicines and therapies. These services are used to monitor and evaluate the safety and efficacy of approved therapies, with the deal set to add $110 million in sales and three cent accretion to annual earnings per share. Needless to say, this is the definition of a bolt-on deal, not making a dent to the investment case here.
And Now?
With 2023 numbers expected to be largely stable, shares still trade at a full 22 times earnings multiple amidst flattish reported growth, but still solid underlying core growth. In the meantime, Thermo Fisher continues to make bolt-on deals which makes sense, but I find myself largely reiterating the conclusion which I drew last year.
Hence, I continue to appraise the achievements of the company and management, yet see no reason to step in right now, at current valuations, I am cautiously hoping for a better entry point.
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