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Thermo Fisher Gets Cool Reception
The movements of stocks immediately after earnings releases can be so visceral and idiosyncratic that sometimes investors are better off ignoring the noise. Such would seem to be the case for life sciences company Thermo Fisher (NYSE: TMO). Although the stock sold off sharply after earnings, the outlook for this company was not all that bad, and Wall Street's overreaction may give patient investors an interesting long-term opportunity.
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The Quarter That Was
Thermo Fisher is never going to be confused with the likes of Illumina (Nasdaq: ILMN) or Luminex (Nasdaq: LMNX) - Luminex is a more diversified, slower-growing play on global life sciences technology. To that point, sales rose more than 6% this quarter, with organic growth a bit below 5%. While Thermo was hurt by weakness in the healthcare and biopharma sectors, and difficult year-over-year comps caused by the H1N1 flu outbreak last year, the industrial side of the business did well. (Learn more about the healthcare sector; see Investing In The Healthcare Sector.)
Thermo once again leveraged single-digit revenue growth into double-digit profit growth. Gross margin improved a bit, as did operating expenses, and the company posted 11% operating income growth. This was largely as expected, though, and the company's EPS of 84 cents was in line with the average estimate.
The Look Ahead
The reality is that Thermo Fisher is huge; no company has a larger sales force in the life sciences equipment and consumables industry. This gives the company amazing reach into all sorts of markets and customers, but it also means that growth will never be eye-popping for any sustained stretch of time. Consequently, that means this stock is one for investors who appreciate efficient, grind-it-out, cash flow growth and a business predicated on repeated sales into familiar channels.
Investors can also take some comfort in the company's mix of equipment and consumables revenue. While Thermo is not so leveraged to high-margin consumables as a company like Techne (Nasdaq: TECH), it is not quite as dependent on equipment placements as companies like Life Technologies (Nasdaq: LIFE) or Bruker (Nasdaq: BRKR). Likewise, Thermo has desirably broad international exposure, including growing businesses in emerging markets like China
Improved ROIC Needed
I would like to see a better return on invested capital (ROIC) from Thermo Fisher, and I would hope that this metric would climb in the coming years as the company better leverages that large sales force. Likewise, Thermo enjoys a reputation for a strong conduit between the lab and the market; leveraging R&D spending into profitable products. Still, if the ROIC cannot go beyond the middling single-digits, what does it really matter? (To learn more about ROIC, see Spot Quality With ROIC.)
Quite frankly, I am conflicted about Thermo Fisher's stock. Thermo is an example where the numbers never seem to match up to my feelings about the company. I think it is a great company, but I cannot adequately explain why the fundamentals are not better than they are. So, while Thermo's stock is certainly cheap enough to get my attention at these levels, I have difficulty putting it much ahead of a stock like Life Technologies, where there is likewise a conflict between perception, fundamental numbers and valuation.
A Lower-Volatility Play On Life Sciences
Although Thermo's stock has historically run into difficulties going above the channel of $50-$60 a share, I think the post-earnings reaction has taken some of the risk out of this stock. While Thermo is not the best or the cheapest, investors looking for a lower-volatility play on life sciences should give it a serious look.
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IN PICTURES: 8 Tips For Starting Your Own Business
The Quarter That Was
Thermo Fisher is never going to be confused with the likes of Illumina (Nasdaq: ILMN) or Luminex (Nasdaq: LMNX) - Luminex is a more diversified, slower-growing play on global life sciences technology. To that point, sales rose more than 6% this quarter, with organic growth a bit below 5%. While Thermo was hurt by weakness in the healthcare and biopharma sectors, and difficult year-over-year comps caused by the H1N1 flu outbreak last year, the industrial side of the business did well. (Learn more about the healthcare sector; see Investing In The Healthcare Sector.)
Thermo once again leveraged single-digit revenue growth into double-digit profit growth. Gross margin improved a bit, as did operating expenses, and the company posted 11% operating income growth. This was largely as expected, though, and the company's EPS of 84 cents was in line with the average estimate.
The Look Ahead
The reality is that Thermo Fisher is huge; no company has a larger sales force in the life sciences equipment and consumables industry. This gives the company amazing reach into all sorts of markets and customers, but it also means that growth will never be eye-popping for any sustained stretch of time. Consequently, that means this stock is one for investors who appreciate efficient, grind-it-out, cash flow growth and a business predicated on repeated sales into familiar channels.
Improved ROIC Needed
I would like to see a better return on invested capital (ROIC) from Thermo Fisher, and I would hope that this metric would climb in the coming years as the company better leverages that large sales force. Likewise, Thermo enjoys a reputation for a strong conduit between the lab and the market; leveraging R&D spending into profitable products. Still, if the ROIC cannot go beyond the middling single-digits, what does it really matter? (To learn more about ROIC, see Spot Quality With ROIC.)
Quite frankly, I am conflicted about Thermo Fisher's stock. Thermo is an example where the numbers never seem to match up to my feelings about the company. I think it is a great company, but I cannot adequately explain why the fundamentals are not better than they are. So, while Thermo's stock is certainly cheap enough to get my attention at these levels, I have difficulty putting it much ahead of a stock like Life Technologies, where there is likewise a conflict between perception, fundamental numbers and valuation.
A Lower-Volatility Play On Life Sciences
Although Thermo's stock has historically run into difficulties going above the channel of $50-$60 a share, I think the post-earnings reaction has taken some of the risk out of this stock. While Thermo is not the best or the cheapest, investors looking for a lower-volatility play on life sciences should give it a serious look.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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