Thermo Fisher: Diagnosis for Profits

10/22/2015 8:00 am EST


John Eade

Chairman and CEO, Argus Research Group

Our latest new buy recommendation is a medical laboratories and research company that provides analytic products and services to customers in the research, clinical, diagnostics, academic, and government markets, explains John Eade of Argus Research.

This well managed company has a record of consistent growth. Over the past five years, it has posted compound annual revenue growth of 13%, net income growth of 16%, and adjusted EPS growth of 19.4%.

Looking ahead, we expect Thermo Fisher (TMO) to sustain its growth in the US and to increase international sales and margins. 

The company also sees opportunities abroad, particularly in China, and currently generates 18% of its revenue from emerging markets. Since 2010, revenue from China has grown at a 31% compound annual rate.

Thermo Fisher has a record of consistent growth. Over the past five years, it has posted compound annual revenue growth of 13% and net income growth of 16%. Adjusted EPS has advanced at a 19.4% rate.

Driven by a more profitable product mix, we expect margins to increase modestly in 2015 and 2016; we project 2015 EPS of $7.37 and 2016 EPS of $8.25. Our long-term earnings growth rate estimate is 10%.

Our recommended weighting on the healthcare sector is overweight. The sector continues to benefit from its perceived insulation from economic turbulence.

In addition, many healthcare stocks have benefited as the pool of people with insurance expands under the Affordable Care Act.

Healthcare has been the sector leader since the start of the bull market in March 2009 and we expect it to carry this momentum forward.

We think that TMO shares are attractively valued at current prices near $126, above the midpoint of their 52-week range of $107-$141.

From a technical standpoint, the shares appear in a promising pattern of higher highs and higher lows that dates to 1Q13.

Relative to peers in the medical diagnostics industry, the stock’s valuation multiples are in the lower half of the industry range; we think they should be higher.

Our target price of $145 assumes multiples of 17.6 times our 2016 EPS estimate and 3.3-times our 2016 sales estimate.

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