Thermo Fisher Scientific Inc.

Moat: 4/5

Understandability: 3/5

Balance Sheet Health: 4/5

Thermo Fisher Scientific Inc. is the world leader in serving science, empowering its customers to accelerate life science research, solve complex analytical challenges, improve patient diagnostics, and increase laboratory productivity.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Thermo Fisher Scientific is a multinational company that serves a very diverse set of customers, from pharmaceutical to government, to research, and diagnostic centers. This diversification serves a double edge sword, reducing risk in terms of demand, but also meaning that the company is difficult to analyze.

Business Overview

Thermo Fisher Scientific (TMO) operates through four segments:

Life Sciences Solutions: Providing a wide array of reagents, instruments, and consumables for biological research and drug discovery. This includes cell culture products, antibodies, proteins, and gene therapy services.
Analytical Instruments: Selling analytical technologies for chromatography, mass spectrometry, and elemental analysis. These products are essential for analyzing and quantifying chemical and physical properties of substances.
Specialty Diagnostics: Focusing on clinical diagnostic products, particularly for specialty testing and clinical chemistry used in research and routine diagnosis of disease, as well as in healthcare provider facilities.
Laboratory Products and Biopharma Services: Offers a broad range of lab equipment, consumables, and other lab supplies, along with clinical trials, quality control and analytical testing services to pharmaceutical companies.

The company has operations and sells its products in many countries across North America, Europe, Asia Pacific, and other regions.

Industry and Competitive Landscape

TMO operates in multiple attractive industries. It is critical to discuss its industry trends for a better understanding of the company.

Life Sciences: The life sciences sector is marked by a few powerful trends: ever increasing amounts of funding into biotech, personalized medicine becoming popular, and the need for research in drug discovery and biopharma. Companies in this sector should be aware of the constant competition, the large amounts of capital needed, the high requirements for R&D, and the regulations required for approval. These factors greatly benefit scale and large firms like TMO.
Analytical Instruments: The demand for high quality and sophisticated analytical instruments is growing due to technological advances and the need for efficient and precise measurements across industries. Companies like Agilent Technologies compete with TMO and are constantly challenged by changing tech and competition, and need high amounts of investments in R&D.
Specialty Diagnostics: The diagnostics market is growing rapidly due to an increased need for disease detection and an increased and aging population. FDA and other regulatory approvals increase barriers to entry. Competitors also include Abbott Laboratories and Siemens Healthineers.
Laboratory Products and Biopharma Services: The demand for lab equipment, consumables and pharmaceutical services has been steadily increasing due to the importance of drug discovery, research, and quality control. Scale is important for these business to thrive due to costs and supply chain needs.

Thermo Fisher’s competitive landscape is diverse, with large players in each segment. However, TMO has been able to establish itself as a dominant leader by developing innovative offerings and a wide array of quality products, services, and solutions. They benefit from scale, and a global distribution network.

Financial Analysis

The company has excellent financials that display a strong business model and growth. Revenues for Q3 2023 reached $10.71 billion (organic revenue growth of 1%), which is slightly lower than projections. However, the company has seen growth of 4% year-to-date. A significant portion of that revenue comes from the Life Sciences solutions segment and their Analytical instruments segment. Operating income for Q3 was at $1.94 billion and EPS was $5.14. As of 9/30/2023, TMO’s total assets stand at $105.96 billion, of which $5.22 billion is cash and equivalents. Total liabilities are at $44.3 billion.

TMO has high amounts of intangible assets at $34.8 billion, however it is to be noted that this has been acquired through acquisitions, and it would impact calculations of ROIC. Long-term debt stands at $23.12 billion, however, the debt to equity ratio for the company is relatively low, at roughly 0.5, with a current ratio of 1.3, making them healthy in the short term. Also, for FY 2023, the company has generated a free cash flow of $5.71 billion, which indicates a profitable company.

Moat Analysis: TMO possesses a wide moat based on the following:

Brand Reputation: TMO is recognized for its high quality products and its ability to innovate in high-tech industries with high barriers to entry like pharmaceuticals. This strong brand reputation, combined with the high switching costs from its integrated client base, creates an advantage for them in the industry.
Network Effects: The company sells complex research products and services, which many organizations have come to rely upon. Furthermore, having their products in a research environment improves the company’s reputation and desirability, leading to greater business.

In my opinion, due to a combination of the above, TMO has developed a durable competitive advantage and a moat. Their moat rating is: 4 / 5 A potential weakness is that the reliance on regulations and the scientific research process could create vulnerabilities in its moat.

Business Resilience and Risks: The following are some of the more important risks to TMO:

Technological Disruption: Emerging technologies and innovative competitors can threaten TMO’s current position. They must innovate and stay ahead of these fast-moving changes, which can be hard for a company of their scale.
Regulatory Changes: Changes in healthcare and pharmaceutical regulations can affect the demand and profitability of TMO’s products and services. TMO’s high reliance on regulatory approvals will mean that this risk is important and must be considered.
Economic Sensitivity: A drop in government funding, or a recession, or economic slowdown would severely affect the industries that TMO sells to, and thereby affecting TMO’s revenue.
Acquisition Integration: Because TMO has grown through acquisition of multiple companies, the failure to integrate those companies into TMO’s own ecosystem effectively could damage their profitability. Also, the acquisitions sometimes bring along unforeseen problems or liabilities that hurt the parent company.
Intellectual Property: Because some of TMO’s moats come from intellectual property, such as patents, a successful challenge to the IP can potentially affect TMO’s revenues.

In addition, TMO has been involved in legal cases with customers, which can become a distraction and cause problems in the financial statements.

Despite these risks, TMO is a very resilient company and has proven its ability to weather economic and market turmoil. The company also has a good diversification among industries, which further strengthens its resilience. Its ability to innovate and maintain margins also bodes well for the company’s future.

Understandability: The main operations and processes of TMO are straightforward to grasp. They provide reagents, instruments, and services to a variety of high-tech industries, which they are leaders in. They derive value through this, as well as through acquisitions that enable them to build on their moats. However, when analyzing its financials, a high degree of expertise and financial acumen is needed to understand the company, and how exactly they generate value. Also, understanding which are the better moats, and what they mean for TMO, is difficult for those with a small amount of background. For these reasons, the company has a moderately complex business, and its understandability score is: 3/5

Balance Sheet Health: The company has great financials, and is overall in a good financial position. They have high assets, relatively low liabilities, strong cash flows, and a robust FCF. Their liquidity ratios also reflect strong liquidity. However, the high levels of goodwill and debt do concern us. For all those reasons, we will rate their financial health as: 4 / 5

Recent Controversies and Management Outlook During their recent earnings call, some analysts highlighted the lower than predicted organic revenue growth, and management acknowledged the concerns about macro-economic conditions. The company also has committed to spending $10 billion on share buybacks.

They believe, that even with a more conservative view, their organic growth will be strong going forward. Management is also focused on delivering for its clients, improving its supply chain, and building long term customer relationships.

The main concerns are related to the lower revenue projections and some possible overpayment for acquisitions they have made. They remain focused on their long-term financial goals, and are committed to delivering shareholder value by having strong earnings and focusing on the businesses they excel in.