The company released Q3 earnings today and exceeded expectations, posting a 21% increase in third quarter profits. The laboratory supply behemoth saw net profit rise to $268.5 million, or 66 cents a share, from $221.2 million, or 53 cents a share from the same quarter of 2009. Revenue rose to $2.68 billion, an increase of 6%, beating the Street’s estimates of 2.59 billion.
The company was also active with its share repurchase program, buying back 10.1 million shares at a cost of $475 million.
Solid caused shares to creep up almost 2% to $51.32 during trading hours, but shares weakened after the market closed.
We’ve been keeping an eye on this company for a while now and are short December puts. That being said, today’s results were pretty much in line with our projections. We maintain that TMO remains undervalued, and after today’s announcement the company is a “buy” for the opportunistic value investor.
Here are three reasons why:
1. Most importantly, based on a discounted cash flow analysis, the firm’s shares should trade in the $65-$75 range, a 27 to 47 per cent premium over today’s closing price of $51.31. Over the medium term, we think the firm to specialty diagnostic business will continue to lead future sales growth due a surge in specialty testing and shifting demographic trends as worldwide populations age. Though healthcare spending has been tight recently in the wake of Obamacare and the recession, retiring baby-boomers over the next ten years will fuel growth in the industry and provide TMO an opportunity to increase both margins and market share.
2. After the 2006 merger between Fisher Scientific and Thermo Electron, the newly formed company is now the largest supplier of lab tools and supplies. As a result, the company has the largest sales force in a market worth about $75 billion. This market share, the shifting demographics, along with a sales force it can cross-leverage, has created a moat around the business which should provide TMO the opportunity to produce returns on invested capital in excess of its cost of capital over the long-run.
3. The company is ramping up into the emerging markets with Chinese and Indian markets appearing particularly fertile ground for expansion. These markets are eager for food safety and quality control products. Because of this new demand, TMO has been investing in the region, and over the next five to ten years, we wouldn’t be surprised to see the company take 25% of China’s $800 million dollar lab tools market.
TMO does face risks, albeit ones it can handle. The company’s sales are mostly to merger-friendly pharmaceutical sector including Pfizer, Bristol-Myers, AstraZeneca, Eli Lilly and Merck. Newly merged pharma conglomerates may make it difficult for TMO to increase prices in developed markets. Further, as the pharmaceutical industry looks to cut costs, cheaper alternatives to TMO’s product line are available.
Another risk can be found in the company’s growth strategy that focuses on the emerging markets. Though the trend towards more environmental safety testing seems to be gaining speed in the region, steps backward in that direction could be impair TMO’s growth and bottom line abroad.
Overall, we believe these risk are limited and the positives of this company outweigh the negatives, making TMO an excellent entry into the health care supply industry in our opinion.
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