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When Thermo Fisher Scientific Inc. (NYSE:TMO) announced the acquisition of CorEvitas this past summer, I concluded that the life science giant was continuing to add to its fortress. The company itself was battling tough comparables, with pandemic-related trends being on their retreat.
Given this battle and the fact that shares commanded a premium valuation, in a higher interest rate environment, I would need to see a $4 handle before initiating a position. A softer current operating performance (with organic sales growth coming to a standstill) makes me cautious to get involved in the high $400s here.
About Thermo Fisher
Ahead of the Covid-19 pandemic, Thermo Fisher was a $25 billion scientific powerhouse, comprised out of laboratory products and service products, science solutions and analytical instruments, and specialty diagnostics.
About half of these sales were generated in North America, and the remainder across the rest of the world, with the business being pretty balanced between equipment sales and consumables, creating a very balanced picture.
Shares traded around the $300 mark at the time, commanding a premium valuation as earnings power came in around $11 per share, as net debt of $17 billion worked down to a 3 times leverage ratio. With 405 million shares trading at those levels, all of Thermo Fisher was valued at $138 billion, equal to 5.5 time sales and 27 times earnings.
An Uplift Provided By The Pandemic
The pandemic created a huge boom in the business and the shares, as the latter peaked around $670 late in 2021. The diagnostic part of the business thrived during the pandemic, although that it is not a fair and easy comparison. This comes as Thermo Fisher actually announced quite a few deals, the least of which as a $21 billion deal for PPD, besides numerous small acquisitions.
Forwarding to February of this year, Thermo Fisher reported revenues for 2022 that were up 15% to nearly $45 billion, having grown some 80% from 2019 levels on the back of a combination of organic growth, M&A and pandemic related influences. Adjusted earnings per share essentially doubled to $23 and change (versus 2019), but these earnings were already down some two dollars from 2022 when the pandemic-related contribution (which was more profitable) was still larger.
For 2023, the company guided relatively flattish. Revenues were originally seen at $45.3 billion, with earning seen around $23.70 per share, as the company did not furnish a break-down of the organic revenue growth contribution, and the impact of pandemic related revenues falling advance. Traditionally paying a small dividend, Thermo announced a 17% hike in the dividend, although that $0.35 per share quarterly dividend does not make a huge difference here.
2023 – Mixed
In April, Thermo Fisher posted a 9% fall in first quarter sales to $10.71 billion, yet core organic growth was reported at 6% as net debt ticked up to $32 billion as a result of a >$2 billion deal for The Binding Site, as announced late in 2022. The company furthermore acquired CorEvitas in a $912 million deal in the summer, truly a bolt-on deal for a firm the size of Thermo Fisher.
With the business set to perform stable in 2023, I saw no need to get involved in the low $500s over the summer, with shares trading at 22 times adjusted earnings, amidst flattish reported growth, but solid core growth. If shares were to fall significantly into the $400s, opportunities might arise.
In July, the company reported a 3% fall in second quarter sales to $10.69 billion, which looks better, but came as core organic growth slowed down to 2%, with many medtech and laboratory names hurt by the impact of higher rates in deferred capital spending.
In October, when shares were trading near their lows, Thermo Fisher announced a $3.1 billion deal for Swedish-based Olink. Thermo offered a massive 74% premium for the shares, hereby valuing them at $31 per share, in order to acquire next-generation proteomics solutions. Once closed, the deal is set to contribute about $200 million in revenues, which are growing at a mid-teens pace. In the near term, about $0.17 per share in dilution is seen, although the deal is expected to contribute over $125 million in adjusted operating income by year five.
Just thereafter, Thermo Fisher announced third quarter sales of $10.57 billion, down 1% on a reported basis, while core organic growth came in at 1%. The combination of slower organic growth and pandemic related revenues on the retreat makes that the business now sees full year sales at $42.7 billion, down quite a bit from the original guidance.
Organic earnings are seen around $21.50 per share, in what is quite a clean earnings number, not being adjusted for large stock-based compensation expenses, among others, while net debt has come down to $29 billion and change already, ahead of the latest announced deal.
What Now?
Trading at $495 per share, the market value of the firm has fallen to $192 billion based on a share count of 388 million shares, for an enterprise valuation around $220 billion. Based on the current earnings power, the company trades around 23 times earnings, but this comes as earnings power has been cut by around 10%, down over $2 per share to $21.50 per share.
Trying to offset some of the disappointment, the board announced another $4 billion buyback program in November. As the business is buying back stock with a >20 times earnings multiple, while its recently issued bonds carry yields of 5% or more, this makes it very hard to get very upbeat here and see the real accretion.
With the organic performance of the Thermo Fisher Scientific Inc. business coming in a bit softer than expected earlier this year, we have seen shares come down, but this has been driven by lower earnings power, rather than Thermo really becoming cheaper here.
In fact, such a pullback was seen in October, when shares fell to the $430 mark, which based on the revised earnings power meant that shares temporarily traded at 20 time earnings, as the multiple has expanded again here given that shares rallied to the high $400s. This makes me cautious to get involved here, as frankly I have lowered the targeted entry point to the lower $400s, let’s say sub $450 here.
