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Thermo Fisher Scientific Inc., (NYSE:TMO), the nation’s biggest laboratory supply company, reliably churns out cash in good times and bad.


At the same time that Thermo profit were under a bit of pressure from the economy’s meltdown, the Massachusetts, company used its impressive free cash flow to go on a shopping spree over the past couple years.

It paid a combined $1.25 billion to snap up about a dozen smaller companies. Then in December it announced a richly priced $2.1 billion cash deal for California instrument maker Dionex (NASDAQ:DNEX).

Thermo also spent a billion dollars last year buying back its own shares, and has authorization to spend a bit more on Thermo buybacks again this year. Despite all the money going out the door, both major credit rating concerns recently bumped the company’s investment-grade debt a notch higher.

And Thermo’s PE ratio, after slumming for a while in the wake of the market’s crash, has lately been climbing back up to its historically plush levels.


Until very recently, YCharts considered Thermo cheap. Now, with the stock’s recovery so well advanced, YCharts says it is correctly priced.

We are probably being overly conservative. Despite its recent rebound, the stock could move significantly higher. Stable end markets and cost-cutting efforts let Thermo deliver solid profits through tough times. Now, as markets strengthen, future profit margins — helped by an offshore growth strategy and the recent acquisitions — are likely to exceed earlier peak-profit levels.

Thermo was itself formed through a late-2006 merger that combined a company that specialized in big-ticket diagnostic and research equipment (like mass spectrometers) and a supplier focused on recession-resistant but less profitable science “consumables” (like test tubes and lab beakers).

The result was that rarest of things: a merger that actually creates the hoped-for synergies. Thermo has been gaining market share because its broad line of products allows pharmaceutical makers, university research labs, healthcare providers and other science clients it serves to consolidate their purchases.

Thermo’s market cap became big enough to catch the attention of more investors.

Research budgets aren’t immune to the economy, of course, but they’re a lot less volatile than, say, demand for new cars or laptop computers. That explains why Thermo’s sales and margins tend to hold up so well during bad times.


And the company is still streamlining:last week, Thermo agreed to sell a couple diagnostic operations — profitable but non-core businesses picked up as part of the 2006 merger — for a bigger-than-expected $740 million in cash.

The problem, of course, is that “stable” markets tend to be slow-growing. That’s certainly the case among Thermo’s client base in Europe and North America, although the company managed to record high-single-digit revenue growth last year. Future revenue gains will most likely come from the laboratory-product maker’s accelerating push into the rapidly expanding science and tech markets of China and India, however.

Along with those positives, there’s a reason for caution: Many of Thermo’s leading customers are pharmaceutical makers, where wide-open R&D spending is a tradition. Although repeated mergers have trimmed the number of major drug makers, overall research spending has held up. While the mega-players continue to spend heavily on research, however, their new size gives them more purchasing muscle when buying lab equipment: Thermo may face more price resistance.

Even with that possibility on the horizon — and even though little-known Thermo is currently sporting a multiple twice that of Intel (NASDAQ:INTC) – it’s still a solid play for investors who favor consistent profits and upside potential.

Disclosure: None

Source: Thermo Fisher: Lab-Supply Giant Went Shopping When the Going Got Tough