The life sciences and healthcare technology industry is projecting a slim outlook for FY13 as the performance of the industry is positively related to the global economy. As budget cuts reduce the demand for pharmaceutical products and patent cliffs further the problem, the industry's growth is expected to slow in FY13 and pick up from the following year. However, the scientific instruments and medical research industry which includes medical devices, diagnostic equipment and other healthcare supplies seems to be performing better. According the Deloitte's 2013 outlook, the revenue growth in this segment is driven by an aging population, disease trends and technological advancements.
Source: Deloitte 2013 Outlook
The above chart illustrates the revenue growth in the medical devices and diagnostic equipments industry over the last nine years. Furthermore, companies in this industry are also pursuing their growth through acquisitions as some of the larger players look to acquire their competitors. Thermo Fisher Scientific Inc. (TMO) is one similar company which is currently looking to acquire another major player of the industry, Life Technologies Corp. (LIFE). Thermo Fisher, with its growth strategies, variety of products and regional diversification, has the capacity to become a profitable stock for investors.
Revenue Profile And Stock Price Trends
The company has exposure to four different markets which include Industry and Applied markets, Healthcare and Diagnostics, Pharma and Biotech and Academic and Government. In terms of products, the company provides consumables, instruments, equipment and software.
Source: Annual Report FY12
The chart above illustrates that the business exposure is spread almost evenly across all four markets. The major source of revenues for the company comes from consumables as this product segment contributes to 55% of the company's total revenues. The chart also shows the regional diversification of the company. Currently, the company has 54% exposure to North America and the exposure to Asia-Pacific is limited to 17%. However, the company is thoroughly pursuing its expansion strategy in Asia.
Source: Deloitte 2013 Outlook
The above chart illustrates the forecasted growth rates of different regions. As the demand for this sub-industry is driven primarily by overall economic growth, the growth strategy to pursue expansion in Asia will prove extremely effective as economic growth in Asia is expected to outperform the other regions. The company has specific focus on China as the country has proved to be very prolific for Thermo Fisher's growth in the Asian region.
The above chart shows the performance of Thermo Fisher's stock against the S&P 500 index over a period of one year. The chart evidently illustrates the company has been consistently outperforming the index since August FY12. This trend is expected to persist as the company stands firm on its future growth prospects.
The growth prospects of the company need to be supported by financial strength and stability in order to allow for sustainable profitable growth. In order to evaluate these aspects of the company's financial performance a three part DuPont Analysis has been conducted.
Data Source: Morningstar
The above chart illustrates a breakdown of the company's ROE into three parts - Net Margin, Asset Turnover and Financial Leverage. There are two important points to be noted from this analysis. Firstly, the ROE is showing an upward trend in the long run as indicated by the linear trend line. Secondly, the ROE is supported majorly by net margins and the company has maintained its ROE without increasing its financial risk which is reflected by the low financial leverage ratio of the company.
Using a few key indicators, a comparative analysis has been conducted in order to estimate the potential of the company as compared to its competitors. Key growth and valuation metrics have been used to evaluate the company in this aspect. Quest Diagnostics (DGX) and Agilent Technologies (A) have been used here.
Data Source: Morningstar
The above table has been divided into two sections. The first part illustrates the revenue and net income growth (3 year averages) along with the D/E ratio of the company. The table clearly shows that the company outperforms its competitors and the overall industry in all three aspects. The second part of the table refers to the valuation of the company and we can clearly see that the company is undervalued with respect to P/B ratio. The P/E ratio is also well below the industry average but when we introduce the earnings growth prospects, we achieve a PEG ratio which is less than the two competitors.
Thermo Fisher is looking specifically towards the Asian markets for growth. Currently, the region's contribution towards the company's revenues is strong. Therefore, this strategy will provide an opportunity to improve revenues and increase regional diversification. Furthermore, the financial strength of the company and the cheap valuation as compared to its competitors on the basis of financial performance will serve as key drivers for the stock price appreciation. Therefore, I recommend a buy position for the long term. Investors in the short run might have to witness undesirable volatility but in the long run, the stock will prove to be profitable.