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In this May 19, 2023 post, I disclose a new position in Thermo Fisher Scientific (TMO) with the purchase of 52 shares @ ~$515; I hold these shares in a 'Core' account within the FFJ Portfolio.
On May 24, TMO held its 2023 Investor Day. Based on the information presented I acquired an additional 25 shares @ ~$507 through another 'Core' account within the FFJ Portfolio.
In this brief post, I share information presented by senior management at its 2023 Investor Day.
Practical Process Improvement Business System (PPI)
TMO's PPI is a deeply ingrained philosophy of operational excellence which allows it to optimize processes, solve challenges and reduce inefficiencies.
Through the use of PPI, TMO has generated impressive growth over the past decade (2012 - 2022).
- Revenue has experienced a 14% CAGR having grown from $14.5B to $44.9B;
- Adjusted EPS has grown at a 17% CAGR: $4.91 to $23.24; $14.5B to $44.9B; and
- Free cash flow (FCF) has grown at a 15% CAGR: $1.8B to $6.9B.
During the 2019 - 2023 timeframe, TMO recorded the following growth:
- Revenue: 77% in total dollar value growth and a 15% CAGR;
- Adjusted Operating Income: 81% in total dollar value growth and a 16% CAGR;
- Adjusted EPS: 92% in total dollar value growth and an 18% CAGR; and
- FCF: 69% in total dollar value growth and a 14% CAGR;
Growth Potential
In 2012, the size of the markets served by TMO was ~$80B. TMO now serves a market size that is ~$240B and which has 4% - 6% long-term market growth potential. Of importance is that TMO and its top 2 competitors have less than 50% market share. Hundreds of smaller competitors have more than a 50% market share which provides TMO with a pool of potential acquisitions.
TMO's long-term core organic growth revenue growth potential is 7% - 9%; it was 5% - 7% pre-pandemic.
From the 7% - 9% core organic revenue growth and 4% - 6% market growth, the plan is to achieve adjusted EPS growth in the mid-teens.
This long-term growth potential is supported by ~7,300 R&D scientists and engineers and the company's focus on R&D investment (a 47% increase in R&D spend and ~$8B in CAPEX over the 2019 - 2023 timeframe).
Capital Deployment
TMO is very disciplined when it comes to capital allocation.
Over time, the plan is to allocate 60% - 75% of the company's capital toward M&A and 25% - 40% toward a return of capital to shareholders.
Guidance
FY2023 guidance is the same as in my May 19, 2023 post. In addition to this guidance, management provided the following at its 2023 Investor Day:
- Covid-19 vaccine and therapies revenue is to either be sustained or switched to other 'Core' revenue;
- The plan is to deploy ~$75+B of capital over the next 5 years. Roughly 65% will be in the form of M&A and ~35% will be comprised of share buybacks/dividends with mid-teens dividend growth;
- The tax rate is expected to increase modestly but should remain well below 15%;
- Maintain investment grade credit ratings; and
- FCF growth to be in line with adjusted EPS growth.
Valuation
At the time of my May 19 post, management's FY2023 adjusted diluted EPS guidance was $23.70. Using my ~$515 purchase price, the forward-adjusted diluted PE was ~21.7.
The forward-adjusted diluted broker estimates and valuation using my ~$515 purchase price were:
- FY2023 - 23 brokers - mean of $23.68 and low/high of $23.22 - $23.76. Using the mean estimate, the forward-adjusted diluted PE is ~21.8.
- FY2024 - 22 brokers - mean of $26.57 and low/high of $24.89 - $27.61. Using the mean estimate, the forward-adjusted diluted PE is ~19.4.
- FY2025 - 17 brokers - mean of $30.19 and low/high of $28.30 - $31.57. Using the mean estimate, the forward-adjusted diluted PE is ~17.
The broker estimates are pretty much the same as a few days ago. The valuation using my most recent ~$507 share price is as follows:
- FY2023 - 24 brokers - mean of $23.68 and low/high of $23.22 - $23.76. Using the mean estimate, the forward-adjusted diluted PE is ~21.4.
- FY2024 - 23 brokers - mean of $26.56 and low/high of $24.89 - $27.61. Using the mean estimate, the forward-adjusted diluted PE is ~19.1.
- FY2025 - 17 brokers - mean of $30.19 and low/high of $28.30 - $31.57. Using the mean estimate, the forward-adjusted diluted PE is ~16.8.
Final Thoughts
The Debt Ceiling issue in the US has likely contributed to the recent weakness in TMO's share price. I can not predict the outcome of the debt ceiling negotiations. However, I can reasonably expect TMO to be far more valuable a decade from now. I am, therefore, taking the opportunity to establish a position in TMO when it is reasonably valued (relative to historical levels) on the expectation that many investors are making investment decisions with a short-term mindset.
After listening to TMO's May 24 2023 Investor Day presentation, I see nothing to suggest that I made a mistake in initiating a position a few days ago. I am even more confident that I made the right decision which is why I have acquired additional shares.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long TMO.
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your research and due diligence. Consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.
