Thermo Fisher shattered recent analyst expectations, with revenue soaring 26% and EPS jumping 58%. Covid-related sales should remain strong, and the company is expected to reap a handsome ROI from investment made in innovative technologies, products, and manufacturing capabilities with all the cash it generated during the pandemic.
Thermo Fisher Scientific Inc. [NYSE: TMO] is one of the largest global companies in the life sciences industry, with annual revenue exceeding $30 billion.
The company develops, manufactures and sells a range of products, including analytical instruments, laboratory equipment, reagents, consumables, software and chemicals to pharmaceutical and biotechnology companies, hospitals and clinical diagnostic labs, academia, research institutions, and government agencies.
It operates through four segments:
- Life Sciences Solutions,
- Analytical Instruments,
- Specialty Diagnostics, and
- Laboratory Products and Services.
Thermo Fisher offers its products and services through various industry-leading brands, including Thermo Scientific, Applied Biosystems, Invitrogen, Fisher Scientific, Unity Lab Services and Patheon.
Thermo Fisher was created in 2006 by the merger of Thermo Electron and Fisher Scientific, and is headquartered in Waltham, Massachusetts.
Is Thermo Fisher Stock A Buy?
If each adversity carries within it the seed of an equal or greater benefit. Thermo Fisher would vouch for this based on recent history; the life science company has been a major beneficiary of the Covid pandemic.
Thermo Fisher, the world’s largest maker of scientific instruments, had the best year in history, as its growth accelerated in 2020, and the stock soared over the last 12 months, thanks primarily to coronavirus testing.
Marc Casper, Thermo Fisher Scientific’s chairman and CEO, said that 2020 was “the strongest year of performance in our company’s history.”
The company has been one of the major providers of Covid-19 tests to governments and healthcare providers during the pandemic. On top of that, it also manufactures some of the raw materials that go into the production of coronavirus vaccines.
Thermo Fisher Scientific Inc announced fourth-quarter and full-year 2020 results in January. The medical research company reported $7.09 earnings per share for the quarter, against analysts’ consensus estimates of $6.56.
EPS increased 100%, while the revenue grew just over 54% in Q4 year-over-year to $10.55 billion. For the full-year, the revenue rose by 26% to $32.22 billion in 2020, and the EPS jumped 58% to $19.55.
The company’s diagnostics and healthcare segment had an outstanding quarter, delivering more than 200% growth. Its Covid testing revenue grew at a precipitous pace as customer demand for its sample preparation, PCR solutions and viral transport media remained very robust.
For the full-year, diagnostics and healthcare grew by more than a 100%, driven by their leading role in supporting Covid testing around the world.
Thermo Fisher’s debt is also nothing much to worry about.
The medical research company’s total debt stood at $21.73 billion, with $19.11 billion in long-term debt and $2.63 billion in current debt. Adjusting for $10.32 billion in cash-equivalents, the company has a net debt of $11.41 billion.
For the uninitiated, current debt is the debt due within one year, whereas long-term debt has a time duration of more than 1 year.
Cash equivalents include cash and any liquid securities with a maturity time period of 90 days or less. The figure of total debt is arrived at by adding short and long-term debts and subtracting it from cash equivalents.
Vaccine Production A Boon For Thermo Fisher
Thermo Fisher, a major beneficiary of increased demand for Covid testing and materials for vaccine production, now expects its 2021 profits above market estimates.
The company, for the fiscal 2021, is forecasting annual profit of $21.62 per share and revenue of $35.1 billion, above estimates of $20.74 per share for profit and a revenue of $33.70 billion.
The company also forecast Covid vaccine and therapy revenue to increase to $1 billion this year, while Covid tests and products brought in sales of $3.2 billion during the fourth quarter.
Thermo’s major acquisitions over the past decade have created their most renowned brands, and the company still shows no signs or intentions of slowing down.
Earlier this year, Thermo Fisher purchased Belgium-based Henogen SA, a unit of contract manufacturing services provider, Novasep, that manufactures viral vectors frequently used in gene therapies to deliver genetic materials into defective cells.
The $879.72 million acquisition of Henogen SA is expected to help strengthen the medical device maker’s position in the fast-growing field of gene therapy manufacturing.
Buoyed by the recent acquisition, Thermo Fisher announced plans to make plasmid DNA for cell and gene therapies in California. It also entered into a joint venture to set up a biological drug development and manufacturing facility in China. Thermo Fisher acquired Brammer Bio a few years back, which also specialized in making viral vectors.
The medical research company also has a contract via Henogen to provide materials to AstraZeneca Plc (AZN) for vaccine development, and has also entered into a deal to provide contract manufacturing services to Inovio Pharmaceuticals Inc (INO), which is developing a vaccine for the novel coronavirus.
The Waltham, Massachusetts-based company also recently purchased Mesa Biotech to strengthen its diagnostic testing business. Bolstered by its revenue and profit during Q4, Thermo Fisher initiated several plans that could play an important role in further boosting its growth in the future.
Thermo Fisher To Benefit From Logistic Concerns
With more than half a dozen vaccines already cleared for use, and the Biden administration ramping up efforts to create more places for people to get vaccinated, reaching the hardest-hit and hardest-to-reach populations, companies like Thermo Fisher are all set to cash in on the windfall.
The task of supplying the world with these vaccines will rest on the shoulders of specialty glass vials and test tube maker such as West Pharmaceutical Services [NYSE: WST] and vaccine refrigerator manufacturers like Thermo Fisher Scientific.
The coronavirus vaccines need to be kept refrigerated, at two to eight degrees Celsius, until they are administered. Medical refrigeration is severely lacking in majority of the developing countries in Asia, Latin America and almost all of Africa. It means TMO, as one of the leading makers of the specialty devices, is again going to majorly benefit from a need for vaccine refrigerators around the world.
With Europe in another grip of a Covid wave, the demand for its testing kit and equipment is likely to remain robust for a long time, which makes this gigantic life sciences company an enticing buy.
Also, the company has handsomely rewarded its long-term investors with its share price up a whopping 317% in the last half decade, which again reiterates the fact that it is a truly great business to buy and hold.
The Path Is Not Without Risk For Thermo Fisher
Given the diverse nature of its business and the multitude of sectors it operates in, Thermo Fisher is exposed to lower levels of risk than other healthcare providers, notably pharmaceutical companies.
Fundamentally, it is pretty hard to find any weakness in TMO. It is a winner in a winning industry.
Thermo Fisher is an attractive long-term investment, and it may be safely assumed the company will continue to deliver robust growth in future.
A few factors that could pose some trouble is that both, the company and the industry in which it operates, face headwinds from foreign-exchange rate moves and raw materials cost inflation.
Can Thermo Fisher Scientific Competitors Dislodge It
It’s a bit difficult to find an organization that competes directly with Thermo Fisher since the company has so many products catering to different markets, including lab supplies, scientific instruments, mass spectrometry, academia, research, DNA sequencing, biochemical reagents, clinical instruments, drug development and pharmaceutical manufacturing, to name a few.
In fact, Thermo Fisher Scientific is an amalgamation of several different companies that merged to form the current company.
Life sciences, diagnostics, and environmental and applied solutions company, Danaher Corporation (DHR), can be considered as the closest competitor of Thermo Fisher, though it is roughly three-fourth the size of Thermo Fisher.
Danaher Corporation enjoys a major presence in scientific instruments, including mass spectrometers, and also in Biomolecule chromatography, courtesy its recent acquisition of Cytiva biopharma business from General Electric (GE).
Danaher also commands a strong position in complex biomedical testing, thanks to its acquisition of Beckman Coulter. However, they are generally weak in the two largest areas of chromatography: HPLC and GC.
Danaher [NYSE: DHR] had a super 2020. The Life sciences and diagnostics company reported EPS of $2.08 on revenues of $6.76 billion in its latest quarter. The company’s revenue for the quarter was up 38.9% compared to the same quarter last year. During the same quarter in the prior year, the firm earned $1.28 earnings per share.
In fact, Danaher’s story for 2020, more or less, resembles that of Thermo Fisher. Both had a stupendous year, thanks to development of vaccines and therapies for COVID-19 as well as demand for their COVID-19 tests toolkit. Both the companies made an astounding comeback after the initial reversal suffered, owing to the pandemic and all the chaos it unleashed.
Management expects the double-digit growth momentum to continue into the new year as well. The company is hopeful that it will see an uptick in non-Covid related growth with the opening of the economy. That’s a positive because it implies that Danaher can continue with its present high-growth rate even after the pandemic has subsided.
Also, Danaher harbors high hopes from its diagnostic segment as the company can benefit from all the new installed systems customers bought to run Danaher’s Covid-19 tests.
Analysts expect the life sciences company to grow revenue over 15 % in 2021 and a somewhat modest 6.3% in 2022. To be frank, Danaher is expensive, which means investors can hope for stellar returns only if the company comes up with a new growth catalyst or the pandemic lasts well into 2022.
Also, to be noted is the fact that there are a few competitors that are stronger than Thermo Fisher Scientific, but only in limited areas. For example, Agilent Technologies (A), with strong presence in life sciences, diagnostics and applied chemical markets has, by far, the largest market share in GC and is a strong second in HPLC and CE.
However, its revenue is only about one-fourth of that of Thermo Fisher, and the company lags far behind in areas such as DNA sequencing and molecular biology.
Another major competitor of TMO, with limited area of strength, include Waters Corporation [NYSE: WAT], with robust position in the area of HPLC, and Illumina [NASDAQ: ILMN], which is very strong in the area of DNA sequencing. WAT’s revenue is about one-eighth of Thermo, whereas Illumina is one-sixth the size of Thermo Fisher Scientific.
Is Thermo Fisher Scientific Stock A Buy?
The company is currently enjoying a strong love affair with the investors and the reason is not at all hard to fathom. The demand for its scientific instruments during the pandemic went through the roof.
Also, high demand for consumables from the companies involved in Covid testing, treatment, and vaccine development allowed it to post better-than-expected quarterly earnings. The company generated $3.2 billion in revenue related to its Covid response efforts.
Even with the slowdown in new infections and virus spread, experts believe that the company’s earnings will remain strong owing to heightened demand for lab equipment and chemical reagents, with the world attention now firmly fixed on the prevention and treatment of infectious diseases.
Covid vaccines are increasingly being made available, but the demand for testing will probably remain strong throughout this year “There are many scenarios where I see testing demand being very robust for a long period of time,” believes Chief Executive Officer Marc Casper.
In fact, one of the key healthcare trends of 2021 will likely be the broader reopening of the economy, and the medical research company will play an important role here through its rapid Covid testing equipment, surveillance tool and technical knowhow.
Thermo Fisher is forecasting bottom line growth of around 50% this year. More importantly, the company is displaying a lot of wisdom by making excellent use of the cash it generated during the current environment. The company was able to make increased investments in new technology, products, and manufacturing capabilities.
In innovation, it ramped up its R&D investment by approximately 20% to $1.2 billion. In emerging markets, TMO expanded its localized capacity and capabilities to further advance its leadership. And to enhance its unique customer value proposition, the company invested significant capex in its high-growth BioProduction, Pharma Services and Biosciences businesses.
Also, more acquisitions in near future cannot be ruled out as it will help Thermo Fischer to further expand its market opportunities. Given the track record of successful M&A and growth prospects, the 24x forward P/E should not pinch investors.
Almost all analysts that have offered an opinion on Thermo Fisher Scientific in the last three months have given it a ‘Buy’ rating. Even the lowest analyst price target ($523) suggests an upside potential of more than 16%.
All in all, the pandemic was the biggest story for Thermo Fisher and it is most likely that the company will continue to reap rich dividends from upbeat demand for its Covid-19 tests and robust sales to pharmaceutical companies, hospitals, diagnostic labs, and research institutions.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.