Founded in 1956, Thermo Electron was a provider of scientific instruments and reagents that eventually merged with Fisher Scientific International in 2006 to become Thermo Fisher Scientific (TMO 0.49%). Over the past 14 years, the combined companies have become a leader in the field of life science solutions, with more than 400,000 customers, including large-cap pharmaceutical companies, universities, and government agencies, that use its services.
From its IPO in the mid-1970s, shares of Thermo Electron (now Thermo Fisher Scientific) would have soared by more than 20,550% as of June 25. A modest investment of $10,000 would have grown to $2.1 million in approximately 50 years. That growth is nothing short of incredible. In the same period, the S&P 500 index returned 2,660%.
While some investors suspect its winning streak may be faltering due to headwinds from COVID-19, I think the rally is far from over. In fact, the company has ample strength in its core businesses and financial health that can allow it to thrive in this environment. Let's take a look at why.
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Rapid response to COVID-19
Since the COVID-19 pandemic began, Thermo Fisher has developed its COVID-19 test kit, which is being authorized for use in more than 50 countries. Additionally, Thermo Fisher launched AcroMetrix COVID-19 RNA control devices to monitor and validate the tests. As of the end of March, the company is now making more than 5 million tests per week. The opportunity is significant, as the U.S. has seen COVID-19 cases skyrocket in the past week to more than 40,000 per day.
Core business growth
The COVID-19 pandemic has not hampered Thermo Fisher's core businesses thanks to the company's diversification. In the first quarter of 2020, Thermo Fisher's revenue, operating income, and earnings per share grew by 2%, 1%, and 5%, respectively, compared with the same period last year. While revenue from its analytical instruments segment declined by nearly 20%, revenue from the life sciences services, specialty diagnostics, and laboratory products divisions appreciated significantly due to increased healthcare demand around the world.
Additionally, the company completed its plans to acquire Qiagen (QGEN -0.88%), a provider of sample and assay technologies for molecular diagnostics, for $11.5 billion during the quarter. Last year, Qiagen brought in more than $1.53 billion in total revenue.
When it comes to profitability, the company's performance has been excellent. Thermo Fisher's gross margin, operating margin, and net profitability stand at 44%, 17%, and 15%, respectively. It also boasts a healthy 13% return on equity. Compared with an average net margin of 8% among industry peers, its profitability can be regarded as superb.
Financial health
With nearly $20 billion in debt and approximately $3 billion in cash and investments, Thermo Fisher is not in the best financial health. Although the company has more than $58.7 billion in assets, nearly half of this, or $25.6 billion, comes from a noncash item called goodwill. Goodwill represents the premium a company pays over an acquired company's (such as Qiagen's) book value. (In Qiagen's case, that premium was more than 20%.) It's vulnerable to write-offs should the latter's business suffer.
The company would barely have any shareholder's equity if its goodwill were subtracted. Fortunately, Thermo Fisher's net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio, a measure of financial leverage, stands at 2.6. This indicates the company's profits are more than enough to handle its debt situation.
Takeaways for investors
Currently, Thermo Fisher is trading at a price-to-earnings valuation of 28, which is rather expensive for a company that has seen its growth stall. However, the company's business is well diversified to survive the impact of COVID-19. As icing on the cake, the company bought back $1.5 billion worth of shares in Q1 2020 and hiked its dividend by 16% -- signs of its underlying financial strength. Overall, I expect Thermo Fisher's growth streak to continue to enrich healthcare investors, warranting a buy on the stock.
