With the threat of a recession looming, Thermo Fisher Scientific (TMO) offers many of the defensive characteristics that investors usually prize during downturns, suggests Rich Moroney, editor of Dow Theory Forecasts.
A life-sciences supplier, Thermo Fisher offers a wide range of products, including diagnostic tests, reagents, and instruments used by medical researchers, drugmakers, and food-safety labs.
More than a pandemic play
Demand for coronavirus tests and vaccines has provided a big lift to Thermo Fisher, generating sales of $9.23 billion in 2021 (24% of total revenue) and $6.63 billion in 2020 (21%). As a result, the company saw free cash flow swell to $14.30 billion for the eight-quarter stretch from April 2020 to March 2022, doubling the prior eight-quarter period.
Coronavirus vaccines and testing led to more than just a massive but momentary windfall — it also helped Thermo Fisher take market share for its instrumentation business and broaden its customer base to include more governments around the globe. This development should leave Thermo Fisher in a stronger position than before the pandemic, even as the coronavirus wave recedes.
In May, Thermo Fisher raised its 2025 target for per-share profits by $0.50 per share to a range of $31.54 to $32.34, versus the then-consensus of $31.83. That guidance implies annual profit growth of 6% to 7% over the next four years. Management expects organic sales growth of 7% to 9% from 2023 to 2025, which includes $400 million in annual revenue from coronavirus testing.
Thermo Fisher has spent more than $50 billion on acquisitions since 2010, benefiting from years of unusually low interest rates and cheap debt. With these deals, Thermo Fisher has built an expansive product roster, transforming the company into a one-stop-shop and strengthening its customer relationships.
The balance sheet contains just $2.75 billion in cash, versus total debt of $33.35 billion. But just 16% of that debt comes due before 2024.
Conclusion
Lower demand for coronavirus testing is expected to squeeze Thermo Fisher’s profit margins this year. The consensus calls for a 9% drop in earnings per share this year, despite 8% higher revenue. For 2023, Thermo Fisher is forecasted to grow profits 7.5% and sales 5%.
Thermo Fisher boasts an outstanding track record for managing expectations, topping the consensus profit estimate in 47 consecutive quarters and the sales estimate in 21 straight quarters. The company has exceeded both consensus profit and sales estimates by more than 10% in each of the past three quarters.
The stock trades at 24 times estimated 2022 earnings and 22 times estimated 2023 earnings — below the median for life-sciences stocks in the S&P 1500 Index. Thermo Fisher is a Focus List Buy.
