A Growing One-Stop Equipment Shop

01/05/2012 7:30 am EST


Taesik Yoon

Editor, Forbes Investor and Forbes Special Situation Survey

The growth and the market expansion continue as this niche company takes a little more market share every day from its competitors observes Taesik Yoon of Forbes Investor.

Thermo Fisher Scientific (TMO) is a leading global provider of products and related services used in numerous scientific applications.

In May, it acquired Dionex Corporation, a maker of chromatography systems. In August, it acquired Phadia AB, a Swedish manufacturer of complete blood systems used to diagnose and monitor allergy, asthma and autoimmune disease.

With these acquisitions, TMO now operates three business segments.

Laboratory Products and Services, which was responsible for 47.8% of third-quarter revenues, provides laboratory equipment and products used by the research, safety, and biopharmaceutical markets. Products include workstations, consumables, containers for sample storage, third-party chemicals, liquid handling pumps, and first responder equipment. Services include packaging, warehousing and distribution, labeling, and pharmaceutical and bio-specimen storage.

Analytical Technologies (32.4% of third-quarter revenues) offers scientific instruments used to analyze samples, related software, and laboratory information management systems. It also sells reagents and consumables used in life science research, drug discovery, and biopharmaceutical applications.

The newly formed Specialty Diagnostics Segment (19.8% of third-quarter revenues) offers products used by the immunodiagnostic, anatomical pathology, clinical diagnostic, microbiology and other healthcare markets. This primarily consists of equipment, reagents, and diagnostic kits and tools used to detect various diseases.

While Q3 results met analysts’ expectations, TMO reduced full-year adjusted earnings guidance from a prior range of $4.15 to $4.25 per share to $4.11 to $4.17 per share due to softening demand from academic and government markets. This weakness materialized towards the end of the quarter and is expected to persist over the near term.

Concerns regarding how long this weaker demand environment will last contributed to a sell-off in shares, with the stock now trading close to its lows of the year. Additionally, the weaker outlook comes at a time when TMO’s total debt balance more than tripled to $7.13 billion (at the end of the third quarter) from $2.14 billion at the end of 2010.

Yet the increased leverage was primarily the result of the two aforementioned acquisitions, which we view as smart strategic decisions for several reasons. Thanks to the favorable borrowing rate environment and the company’s strong cash flow generation history, the average weighted interest rate on the long-term portion of the debt assumed to finance these transactions (about $4.30 billion) is just 3.3%.

Moreover, Dionex has already begun contributing to the bottom line on an adjusted basis, while Phadia is expected to add 26 to 30 cents to adjusted per-share earnings in 2012. This is why, even with the downward revision, Q4 earnings are still expected to grow at least 13%. Total revenue, cost and tax synergies from the two acquisitions are projected to reach $60 million and $35 million, respectively, by the third year of operations.

These contributions should help ease any additional softening of demand from the academic and government markets in the coming year. Furthermore, the acquisitions strengthen TMO’s overall market position within the clinical diagnosis, life sciences, chemical, petrochemical, food and beverage, power generation, and electronics industries.

They will also likely help the company maximize its business opportunities once demand from the academic, government and other key markets begin to rebound. Thus, with the stock trading at roughly ten times its consensus analysts’ earnings estimate for 2012, which represents a sharp discount to its five-year average forward P/E of 14, this is an opportune time to buy.

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