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In my November 14, 2023 Buy Thermo Fisher (TMO) While It Faces Short Term Headwinds post, I state the time to invest in great companies is when they face temporary headwinds and fall out of favor with many investors. In my December 8 guest post at Dividend Power, I conclude that TMO was still fairly valued despite its share price having increased to ~$492 from my November 13 ~$445 purchase price. Hopefully, management's guidance for short term demand softness will pressure Thermo Fisher's valuation.
Prior to the release of its Q4 and FY2023 earnings and FY2024 outlook on January 31, TMO's share price surged to ~$567 on January 30. On January 31, TMO's share price experienced a pullback to ~$538 before recovering slightly. As I finalize this post, shares trade at ~$545.50 on February 2.
With the release of Q4 and FY2023 results and FY2024 outlook on January 31, I revisit TMO.
Business Overview
I recommend reviewing the company's website and Part 1, Item 1 in the FY2022 Annual Report and Form 10-K to gain a good understanding of the business.
In addition, I reviewed material presented at TMO's 2023 Investor Day in my May 24, 2023 post.
Olink Holding AB Acquisition
On October 17, TMO announced it had entered into a definitive agreement to acquire Olink Holding AB, a leading provider of next-generation proteomics solutions. The transaction values Olink at ~$3.1B which includes net cash of ~$0.143B.
The transaction is expected to be completed by mid-2024 and is subject to customary closing conditions, including regulatory approvals. Upon completion, Olink will become part of TMO's Life Sciences Solutions segment.
Financials
Q4 and FY2023 Results
Please refer to TMO's Q4 2023 Earnings Release, and the GAAP and Non-GAAP Reconciliation and Financial Package.
Free Cash Flow (FCF)
In FY2013 – FY2023, TMO generated FCF of (in millions of $): 1,728, 2,192, 2,519, 2,814, 3,497, 3,785, 4,047, 6,815, 6,789, 6,911, and 6,927.
The annual FCF reflected in TMO's GAAP/Non-GAAP Reconciliation and Financial Package differs slightly from the figures above because it adds back the proceeds from the sale of property, plant, and equipment. These amounts, however, are negligible. In FY2020 - FY2023, TMO's proceeds from sale (in millions of $) were 8, 20, 24, and 87.
FY2024 Guidance
TMO's FY2024 revenue guidance is $42.1B - $43.3B and adjusted EPS guidance is $20.95 - $22. This guidance assumes core organic revenue growth in the range of -1% to +1%.
Expectations are for market conditions to experience a low single digit decline.
The current estimate of pandemic-related revenue in 2024 is just under $0.1B of testing revenue and $0.3B - $0.4B of vaccines and therapies related revenue. In total, this represents a YoY headwind of $1.3B - $1.4B or 3% of revenue.
Through the aggressive management of its cost base, TMO expects its FY2024 adjusted operating income margin will be 22.3% - 22.8%.
The FY2024 net interest expense forecast is ~$0.43B and the adjusted income tax rate estimate is 10.5%.
The CAPEX guidance is $1.3B - $1.4B and the assumption is for $6.5B - $7B of FCF.
Guidance assumes $3B of share buybacks; this was completed in January.
The estimate is for the full year average diluted share count to be ~383 million shares.
The current assumption is that ~$0.6B of dividends will be distributed in FY2024. This, however, is based on TMO closing the Olink acquisition by mid-2024.
Credit Ratings
There are no changes to TMO's domestic unsecured long-term debt ratings from the time of my December 8 review.
- Moody's continues to assign an A3 rating with a stable outlook.
- S&P Global continues to assign an A- rating with a stable outlook.
- Fitch continues to assign an A- rating with a stable outlook.
All three ratings are the bottom tier of the upper medium grade investment grade category. They define TMO as having a strong capacity to meet its financial commitments. TMO, however, is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.
TMO's Net Debt/Adjusted trailing 12 month EBITDA has improved to 2.5x versus 2.9x in Q1 2023.
Source: TMO - GAAP/Non-GAAP Reconciliation and Financial Package - January 31, 2024
TMO's debt maturity schedule does not raise 'red flags'.
Source: TMO - GAAP/Non-GAAP Reconciliation and Financial Package - January 31, 2024
Source: TMO - GAAP/Non-GAAP Reconciliation and Financial Package - January 31, 2024
Dividend and Dividend Yield
TMO's dividend history is accessible here.
On January 16, 2024, it distributed its 4th consecutive $0.35/share quarterly dividend. I envision that in the second half of February, a $0.04/share increase will be declared with the first $0.39/share dividend to be distributed in mid-April. At $0.39/share/quarter and a ~$545.50 share price, the dividend yield is negligible.
The bulk of TMO's future total investment return is likely to continue to be predominantly in the form of capital appreciation.
The following table reflects TMO's share buybacks in FY2020 - FY2023.
Source: TMO - GAAP/Non-GAAP Reconciliation and Financial Package - January 31, 2024
The weighted average diluted shares outstanding in FY2013 - FY2022 (in millions) were 366, 402, 402, 397, 398, 406, 403, 399, 397, and 394. In Q4 2023, this had been reduced to ~388 million shares. As noted above, TMO repurchased another $3B shares after December 31, 2023.
Stock Splits
TMO had three 3 for 2 stock splits in the 1990s (1993, 1995, and 1996).
Valuation
On November 13, I acquired 25 additional shares at ~$445. Using the currently available forward-adjusted diluted broker estimates, I arrived at the following forward-adjusted diluted PE levels:
- FY2023 – 26 brokers – a forward-adjusted diluted PE of ~20.6 using a mean of $21.56 and low/high of $21.47 – $22.10.
- FY2024 – 25 brokers – a forward-adjusted diluted PE of ~20.2 using a mean of $22.04 and low/high of $21.70 – $25.71.
- FY2025 – 19 brokers – a forward-adjusted diluted PE of ~18 using a mean of $24.73 and low/high of $23.24 – $28.09.
When I wrote my December 8 guest post at Dividend Power, TMO’s share price had rebounded from a ~$415 low at the end of October to ~$492. Using the forward-adjusted diluted broker estimates, TMO’s forward-adjusted diluted PE levels were:
- FY2023 – 26 brokers – a forward-adjusted diluted PE of ~22.8 using a mean of $21.56 and low/high of $21.47 – $22.10.
- FY2024 – 25 brokers – a forward-adjusted diluted PE of ~22.3 using a mean of $22.04 and low/high of $21.70 – $25.71.
- FY2025 – 19 brokers – a forward-adjusted diluted PE of ~20 using a mean of $24.73 and low/high of $23.24 – $28.09.
Based on forward earnings estimates, I concluded TMO to be fairly valued at ~$535 – ~$540.
In FY2023, TMO generated $15.45 of diluted EPS and $21.55 of adjusted diluted EPS. With shares trading at ~$545.50, the diluted PE and adjusted diluted PE are ~35 and ~25.
It generated $6.927B of FCF in FY2023 and the diluted weighted average shares outstanding was 388 million thus resulting in ~$17.85 of FCF/share and a P/FCF of ~31.
The company's FY2024 adjusted EPS guidance is $20.95 - $22. On this basis, the forward adjusted diluted PE range is ~25 - ~26.
The current forward-adjusted diluted broker estimates are likely to be adjusted over the coming days. Based on the currently available estimates, however, TMO’s forward-adjusted diluted PE levels are:
- FY2024 – 26 brokers – a forward-adjusted diluted PE of ~25 using a mean of $21.90 and low/high of $21.31 – $25.71.
- FY2025 – 24 brokers – a forward-adjusted diluted PE of ~22 using a mean of $24.49 and low/high of $23.38 – $28.09.
- FY2026 – 13 brokers – a forward-adjusted diluted PE of ~20 using a mean of $27.38 and low/high of $26.25 – $30.53.
Using the $6.75B mid-point of TMO's FY2024 FCF guidance and guidance for the full year average diluted share count to be ~383 million shares, we get ~$17.62 FCF/share and a P/FCF of ~31.
TMO's valuation is slightly less attractive than when I wrote my November 14 and December 8 posts. The share price, however, can be volatile. If the share price were to retrace to at least ~$520 I would look to increase my exposure. At ~$520 and using management's FY2024 adjusted diluted EPS guidance, the forward adjusted diluted PE would be ~23.6 - ~24.8. From a P/FCF perspective, we get ~29.5 (~$520/~$17.62).
Thermo Fisher's Valuation - Final Thoughts
When I completed my 2023 Year End FFJ Portfolio Review, I held 177 shares (52 shares and 125 shares in two different 'Core' accounts) in the FFJ Portfolio; TMO was my 30th largest holding. I wish to increase my exposure and am hoping that TMO's weak FY2024 guidance will ultimately translate into to an attractive share price pullback. At the moment, however, I am disappointed TMO's share price has not experienced more weakness. Nevertheless, TMO's share price can be volatile and a share price decline to at least ~$520 is not out of the realm of possibility.
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.
