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Thermo Fisher: Not Just a Dollar Play

Posted on: September 16, 2008 - Email Article - Printable Version

Allen Lutz

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Since 2002, investors have fallen in love with companies offering strong international exposure. Foreign exchange benefits have helped the healthcare sector shrug off years of low single digit organic growth. But the rest of the world is slowing down and the dollar has rallied in recent weeks. European policy makers have made plans to follow the path of the United States by cutting lending rates. This means a lot of companies with attractive international exposure will be thrown away as top-line gains become losses.

For example, Becton Dickinson and Company [BDX: 68.49, -0.62 (-0.90%)] has reported very strong earnings over the past few years, benefiting from the weakening dollar because they earn 57% of revenues outside the United States. They have been one of my favorite stocks because of their consistent earnings out performance. According to a Barron’s article written by Credit Suisse analysts, “foreign exchange has contributed $278 million to the top line, accounting for six percentage points of the 13% year-over-year growth”. Almost half of their top-line was reflecting the weak greenback! Also, BDX’s share price took a hit in the middle of the summer after analysts believed resin prices (an oil based derivative used in their products) would hurt margins. Management said the increase in resin prices would be more than offset by strong Forex gains. Now that Forex gains are shrinking and resin prices remain elevated. Investors looking for a hedge against the rising dollar should look no further than Thermo Fisher Scientific [TMO: 35.03, -0.45 (-1.27%)].

Thermo Fisher Scientific

Thermo Fisher was formed in 2006 after the merger of Fisher Scientific and Thermo Electron Corp. Thermo Fisher provides a wide range of laboratory tools, instruments, software and services to the life science industry. They have over 30,000 employees in 38 countries and sell their products in about 150 countries. Their growth depends on research and development expenditures from pharmaceutical, biotechnology, diagnostics and food safety industries. Unlike a lot of their medical device competitors, Thermo Fisher does not experience major swings from foreign exchange. They have natural hedges because they operate a lot of their manufacturing units outside the United States. This has hurt them over the past few years as the dollar slid against the Euro and the Yen, but should now allow them to trade at a premium to competitors who are affected by currency swings.

Deutsche Bank estimates TMO’s 3rd and 4th quarter Foreign exchange benefits will be 4.5% and 2.0% versus the peer group averages that are much higher. As the dollar strengthens and valuations are recalculated, Thermo Fisher is in a prime position to attract investors because their underlying growth is also very strong. Organic growth in the 2nd quarter was 8%, its highest in five years. Strong demand for instruments in Asia helped garner a 14% increase in revenues and 51% increase in net income year over year. Management raised the low end of their earnings guidance in July to $3.11-$3.17 representing a 17% increase over 2007.

Valuation

Thermo Fisher trades in line with peers who are much more at risk from the volatile currency market. Some of their main competitors are Becton Dickinson [BDX: 68.49, -0.62 (-0.90%)], Perkin Elmer [PKI: 14.81, +0.08 (+0.54%)], and Millipore Corp [MIL: 52.72, -0.10 (-0.19%)]. All numbers are taken from Yahoo! Finance.

Thermo Fisher Scientific

Forward P/E - 15.95
LT EPS Growth Rate - 16.50%
(P/E)/LT EPS Growth Rate - 0.967
EV/TTM EBITDA - 13.03x

Becton Dickinson and Company

Future P/E - 16.59
LT EPS Growth Rate - 13.00%
(P/E)/LT EPS Growth Rate - 1.27
EV/TTM EBITDA - 10.238x

Perkin Elmer Inc.

Future P/E - 14.83
LT EPS Growth Rate - 14.80%
(P/E)/LT EPS Growth Rate - 1.00
EV/TTM EBITDA - 12.40x

Millipore Corp.

Future P/E - 18.35
LT EPS Growth Rate - 14.00%
(P/E)/LT EPS Growth Rate - 1.31
EV/TTM EBITDA - 13.12x

Final Thoughts

Thermo Fisher trades at a strong discount on a PEG ratio basis possibly reflecting their lack of greater currency gains in recent years. According to Zacks.com, TMO’s Long Term EPS growth rate is 16.80%, much higher than its competitors. They also have the best organic growth of their peers. As the rest of the world gets weaker and investors begin to re-evaluate the macroenvironment and its effects on earnings, Thermo Fisher should stand to gain.

-Allen Lutz

Disclosure: The author is long BDX, the author’s family is long BDX, and the mutual fund the author manages is long BDX.

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