I last reviewed Thermo Fisher Scientific (TMO) in this August 2 post at which time Q2 and YTD2023 results had recently been released; I concluded shares were overvalued at ~$544.
Following that post:
- TMO completed the CorEvitas acquisition I touched upon in my previous post.
- Novo Nordisk hired TMO to help fill the injection pens for Wegovy, the first-to-market in a new class of highly effective weight-loss drugs, through TMO's Contract Development and Manufacturing Organization (CDMO) subsidiary Patheon, at a factory in Greenville, North Carolina. This facility serves as a multipurpose drug manufacturing site covering solid dosages, sterile drugs and secondary packaging. It is TMO's first facility to feature a fully functional continuous manufacturing line.
Novo engaged TMO's services after Catalent, its first contractor, repeatedly failed to meet Federal Drug Administration (FDA) regulations.
Valuation
When I wrote my August 2 post, TMO had recently reported YTD GAAP EPS and adjusted diluted EPS of $6.83 and $10.18, respectively. Its revised adjusted EPS guidance was $22.28 - $22.72 and TMO suggested analysts use $22.36 for modelling purposes. Using $22.36 and the current ~$544 share price, the forward adjusted diluted PE was ~24.3.
While some brokers were still in the process of reassessing their guidance, TMO's valuation was as follows based on the currently available forward-adjusted diluted broker estimates:
- FY2023 - 23 brokers - mean of $22.38 and low/high of $22.26 - $22.63. Using the mean estimate, the forward-adjusted diluted PE is ~24.3.
- FY2024 - 22 brokers - mean of $24.72 and low/high of $23.57 - $26.06. Using the mean estimate, the forward-adjusted diluted PE is ~22.0.
- FY2025 - 17 brokers - mean of $28.09 and low/high of $25.57 - $31.88. Using the mean estimate, the forward-adjusted diluted PE is ~19.4.
I also noted that there was a $3.60, $5.67, and $5.61 gap between GAAP EPS and adjusted diluted EPS in FY2020 - 2022. In addition, there was a $3.35 gap between GAAP EPS and adjusted diluted EPS in the first half of FY2023. A sizable component of this variance, however, is related to the amortization of acquisition-related intangible assets which does not impact TMO's cash flow.
I did not think TMO would generate $6.83 in diluted EPS in the second half of FY2023 as it did in the first half. I, therefore, arbitrarily assumed TMO would generate $6.40 of diluted EPS in the second half, thereby giving us ~$13.23 of diluted EPS in FY2023. With shares trading at ~$544, the forward diluted PE was ~41.1. This is high when compared to TMO's historical valuation over the FY2013 - FY2022 timeframe.
Having just purchased shares at ~$514, the forward diluted PE is ~38.9.
In addition, using the current forward-adjusted diluted broker estimates, I get the following forward-adjusted diluted PE levels:
- FY2023 - 26 brokers - mean of $22.38 and low/high of $22.26 - $22.64. Using the mean estimate, the forward-adjusted diluted PE is ~23.
- FY2024 - 25 brokers - mean of $24.63 and low/high of $23.57 - $25.65. Using the mean estimate, the forward-adjusted diluted PE is ~20.9.
- FY2025 - 19 brokers - mean of $27.93 and low/high of $25.57 - $31.88. Using the mean estimate, the forward-adjusted diluted PE is ~18.4.
I now consider TMO to be fairly valued.
Final Thoughts
In my prior post, I stated that I would consider adding to my exposure if TMO's share price retraced to ~$510. At ~$514, this is close enough hence my decision to acquire another 25 shares.
I now hold 152 shares (52 shares and 100 shares in two different 'Core' accounts) in the FFJ Portfolio.
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.
