The pandemic has been a tailwind for several sectors of the economy, including healthcare. One name that has especially benefited has been Thermo Fischer Scientific Inc. (TMO, Financial). Shares of the company are higher by 31% over the last year and the stock has more than doubled over the last two years, as Covid-19 has been a major contributor to results.
But Thermo Fischer is more than just a Covid-19 story. The company recently reported strong earnings figures that showed gains throughout its businesses. The stock also trades below its medium-term valuation, opening up the possibility that Thermo Fischer, after two excellent years, is actually undervalued.
A rundown of earnings highlights
Thermo Fischer reported its third-quarter earnings results on Oct. 27. Revenue grew 9.5% to $9.3 billion, beating Wall Street analysts’ estimates by $920 million. Adjusted earnings per share of $5.76 was a 13 cent, or 2.3%, improvement from the prior year as well as $1.06 ahead of expectations.
Organic growth for the company’s base business was 10%. Covid-19 contributed $2.05 billion towards quarterly revenue. The company expects that pandemic-related revenues could reach $6.7 billion for 2021, up slightly from the prior year.
Life Sciences Solutions grew 9% to $3.72 billion due to gains in the bioproduction and biosciences areas. Volumes were also higher from the prior year.
Laboratory Products and Services improved 12% to $3.49 billion with all businesses performing well.
Analytical Instruments were up 11% to $1.48 billion. Gains in this segment were driven by electromicroscopy, chromatography and mass spectrometry businesses. Higher productivity and volume pull-throughs were highlighted as reasons for the revenue improvement.
Specialty Diagnostics was lower by 5% to $1.36 billion. Lower Covid-19 testing was only partially offset by increases in immunodiagnostics, transplant diagnostics and clinical diagnostics.
The company ended the quarter with a balance sheet is great shape. Thermo Fischer had total assets of $73.6 billion, current assets of $24.7 billion and cash and equivalents of $12 billion. This compared to total liabilities of $34.9 billion and current liabilities of $7.8 billion. Total debt was $21.7 billion, but just $19 million is due within the next year.
Thermo Fischer also updated its guidance for the year. The company now expects revenue of $37.1 billion, up from $35.9 billion previously, and adjusted earnings per share of $23.37, up from $22.07 previously. This would be a 15% gain in revenue and a 20% improvement in adjusted earnings per share compared to the prior year.
For 2022, the company expects revenue of $40.5 billion, up from $40.3 billion, and adjusted earnings per share of $21.36, up from $21.16 previously.
Takeaway
Third-quarter results were impressive, but they were also on top of a very good showing in the prior year. Revenue for the third-quarter of 2020 was a 36% improvement from the same period of 2019 while adjusted earnings per share increased 91%.
Over the last two years, third-quarter revenue was up a combined nearly 50% while adjusted earnings per share almost doubled.
As stated above, the pandemic was a driver of growth in the quarter, but the company’s base business still performed very well. Third-quarter revenues excluding Covid-19 were a 16% improvement from the third quarter of 2019, showing that the company didn’t have much issue seeing gains amongst its businesses.
The company has been a solid performer in its industry as earnings per share had a compound annual growth rate of 10% for the 2009 to 2019 period of time.
Then in 2020, earnings per share more than doubled year-over-year as Thermo Fischer’s products had a surge in demand related to Covid-19. The company has followed that up with strong results this year, thanks in no small part to the ongoing pandemic and the emergence of Covid-19 variants.
With the assumption that eventually the pandemic will subside, it might be expected that Thermo Fischer might see its businesses return to normal, but the company also raised its guidance for 2022 revenues at the time of its most recent earnings release.
And this growth is predicated not on the pandemic, but on strength in the company’s core businesses as well as its history of making strategic acquisitions.
One such recent example is the pending $17.4 billion acquisition of PPD, Inc. (PPD). PPD is a clinical research services company that works with pharma and biotech customers around the world and had revenue of $4.7 billion in 2020. According to leadership, PPD is expected to add $6 billion in annual revenues and $1.50 of adjusted earnings per share in the first year as part of Thermo Fischer.
Notice that PPD is expected to replace nearly all of the company’s Covid-19 related revenue for the year. The transaction is expected to close before the end of the year. PPD will augment Thermo Fischer’s presence in pharma and bioscience, its largest and fastest growing end market.
Emerging markets also represent opportunities for Thermo Fischer. The company generates around $7 billion annually from emerging markets. China is a very important market as sales to the country accounted for about 10% of all sales. Leadership has forecasted that China will be one of the company’s fastest growing region in the coming years.
Valuation analysis
Shares of Thermo Fischer trade hands at $635 today. Using company guidance for the year, the stock has a forward price-earnings ratio of 27.2. According to Value Line, Thermo Fischer has five- and 10-year average price-earnings ratios of 29.4 and 24.9, respectively.
Given the performance of the company during the pandemic as well as its expectation for continued growth once Covid-19 is less of a tailwind, a valuation range of 28 to 30 seems appropriate. Applying estimates for the year against this range results in a price range of $654 to $701. Shares could return more than 10% from current levels if they were to reach the top end of this target valuation range.
Final thoughts
Thermo Fischer has enjoyed what is likely to be two record setting years in a row. Some of this is due to Covid-19, but the core business is generating good organic growth. Quarterly results showed gains against an extremely difficult comparable period and still surpassed analysts’ estimates. In addition, the PPD acquisition will add materially to both the top- and bottom-lines
The company also raised its guidance for the current year as well as 2022. Shares trade below their medium-term valuation. Considering the company’s current state of its business, the PPD acquisition and the company’s own guidance, Thermo Fischer looks undervalued relative to its own history even after the gains seen over the past year. This suggests that it’s not too late to own shares of Thermo Fischer.
