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Growth at reasonable price, long-term horizon, dividend investing, research analyst
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Summary

  • TMO reported very impressive numbers on July 23, 2014.
  • The increased synergies from the Life Technologies acquisition and the impending divestiture of the Cole-Parmer business resulted in raised guidance.
  • The Life Technologies takeover has led to the emergence of an unrivaled market leader serving research, specialty diagnostics and applied markets.

On the last Tuesday of 2011 I made my last purchase of the year. I had been working on a project of analyzing the available Mutual Funds in the 401(k) I was about to begin contributions into, and decided to rank them by ranking each of the holdings using the same criteria I used in my general trading and IRA investments. Also, at the time, I was using the project to teach my wife the ins-and-outs of my process, and it came down to choosing between two whose metrics were almost virtually identical and I did not have a specific pulling to one or the other--so I let her choose.

She picked Thermo Fisher Scientific (NYSE:TMO), the maker of analytical instruments, equipment, reagents and consumables, software, and services for research, manufacturing, analysis,discovery, and diagnostics in the United States and internationally. Since then we have enjoyed a total return of +96.44%, including reinvested dividends. My only regret was not putting a much more sizeable stake into her pick!

TMO was among the first group of stocks which I had chosen with the addition of PEG to my metric screen (thanks to one of the holiday episodes of Jim Cramer filmed ahead of time about general trading principals), and I credit this addition of PEG to my much more refined stock picking from that time forward. I also see several bad choices I could have avoided with PEG in my arsenal rather than P/E, as P/E is not very useful in comparisons between stocks in different industries without constantly adjusting expected P/E for the industry/sector, and in comparison to the P/E of the broader market--which can be done, but for me I like the much more graphical finality of "Is this a PEG of less than 2, or is the PEG more than two?". A PEG of less than two is very desirable and has rarely steered me wrong in the last almost 3 years. I cannot think of similar specific instances where P/E ever influenced me as clearly.

So I have been happy with TMO, and as of the most recent earnings report on July 23, 2014, TMO surpassed the adjusted EPS from the year prior by 30%, boding well for continued future value generation. Revenues increased by 33% from 2013, 27% of that due to acquisitions. TMO also increased their EPS guidance slightly, from 25% to 26% on the low end and from 28% to 29% on the high end.

However, if I were to apply my screen to the stock as I did back in December, 2011, TMO would not be a buy at these levels. They have become a victim of their own success in this regard, like much of the broader market, running up to levels that are prohibitive of accumulation for value growth. The PEG has creeped up to 2.56, prohibitively high for me to consider initiating a position unless a lot of compelling evidence is found elsewhere. In this case, it would not be dividend, as this has also been negatively affected by price appreciation, drifting down to 0.60%. Also, at the end of 2011, TMO had fallen sharply during the course of the previous six months, whereas now it is just 5.65% below the 52 week high of $127.32, giving TMO a very high implied run room in 2011 that does not exist now. The two bright notes I would point out, indeed as a case to hold even if accumulation is off the table, is the Analyst Recommended Mean Consensus score of 1.50, and a Consensus target price of $141.79 is a 14.4% increase over Tuesday's close of $121.38.

Average revenue growth of 7.66% per year for the past 5 years is pretty impressive for a 13 billion dollar turnover company. However due to sharp increase in operating cost, TMO is unable to keep up the growth in terms of net profit. Strong management and good cost control measures are needed in order for the company to sustain growth in the long run. Only growth in the company's net profit will be the key to achieve capital gain for shareholders.

Additional Thoughts:

Pros

• Revenue is in a growing trend with a good 5 year increasing track record. Average increment of 7.66% per year.

Cons

• Net income slipped since 2012 financial year as compared to 2013 due to sharp increases in operating cost. Current net earnings (FY2013) are still below what was achieved in FY 2011.

• Net profit margin of 10.76% is on the low side considering the company is in a non-retail sector.

• Current Ratio is at 1.36 which shows that the company still has a significant amount of debt on hand (Current Ratio = Current Assets/Current Liabilities).

• Again, the Dividend payout ratio of 15% and Dividend yield of 0.6% is less attractive to my investing strategy.

Now, to summarize: I would not be accumulating TMO at these levels, but still consider them a very viable holding, and would look to add to my holdings if the price to purchase dropped to the $98 or below range, or if the PEG Ratio dropped below 2.

Source: Thermo Fisher Scientific: Too Hot For Too Long