An Interesting MedTech Stock Idea

Test tubes over financial data

According to a recent report from Moody’s, the medical device (medtech) industry should be very healthy this year, seeing earnings growth of 4.5%-5.5%—compared to a stable outlook for pharmaceuticals and U.S. for-profit hospitals.

Drivers of this growth include forecasted 10%+ revenue expansion in emerging markets and the continuation of mergers and acquisitions. There were a host of large mergers in medtech last year, including:

  1. Medtronic buys Mazor Robotics for $1.6 billion
  2. BSX makes offer to buy BTG for $4 billion
  3. Becton Dickinson & Company‘s $24 billion acquisition of C.R. Bard

And according to industry experts, there’s more to come! And that bodes well for one of our recent medtech stock recommendations in my Wall Street’s Best Investments newsletter.

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A MedTech Stock to Consider

The company is Thermo Fisher Scientific Inc. (TMO), a $102.19 billion market cap medical device maker, which began its life in 2006 via a merger of Thermo Electron and Fisher Scientific. It has continued building its brand through internal growth as well as numerous acquisitions, including its 2018 fall buyout of Becton, Dickinson and Company’s Advanced Bioprocessing business, a subsidiary with $100 million in annual revenue.

TMO was recommended by Richard Moroney, editor of Dow Theory Forecasts. Here is his case for buying this medtech stock:

“Thermo Fisher Scientific Inc. (TMO) bills itself as ‘the world leader in serving science.’ The life-sciences titan provides a variety of equipment, supplies, and services for both the research and practical sides of the healthcare market.

“This wide-screen approach has supported impressive growth. Sales rose 21% in the 12 months ended September, with per-share profits up 29% and operating cash flow 38%. Over the last five years, Thermo Fisher managed annualized growth of at least 13% in all three metrics. The consensus projects growth of 3% in sales and 14% in per-share profits for the December quarter and growth of 5% in sales and 11% in profits for full-year 2019. Analysts expect that double-digit growth to continue, calling for annual profit growth of more than 11% over the next five years.

“We’re adding the shares to the Focus List this week because we see a lot of reasons for optimism about the shares. Here are just a few: 

1. Broad spectrum: Thermo Fisher operates in four business units:

  • Laboratory products and services (39% of revenue in the first three quarters of 2018)
  • Analytical instruments (21% of revenue)
  • Specialty diagnostics (15%)
  • Life-sciences solutions (25%)

Most of Thermo Fisher’s operations assist companies doing pharmaceutical, genetic, or industrial research. Such diversity limits Thermo Fisher’s exposure to weakness in any individual slice of the healthcare sector.

2. Broad spectrum, second dose: This point is connected to the previous one, as Thermo Fisher’s business mix allows it to target multiple end markets. In the first three quarters of 2018, the company generated 38% of its revenue from drug and biotechnology firms, with the rest coming from healthcare providers and diagnostic labs (21%), industrial and applied science firms (19%), and academic or government researchers (22%).

3. Big and strong. Thermo Fisher, with sales of nearly $24 billion in the last year and a stock-market value of nearly $100 billion, is the giant of the life-sciences group, more than twice the size of its largest competitor. In this highly fragmented industry, most rivals focus on one or two specialties, while Thermo can provide turnkey product and service packages other companies cannot.

4. Signs of recovery. Since January 2, when Bristol-Myers Squibb (BMY) announced plans to acquire Celgene (CELG), life-sciences stocks have rallied an average of 4%. This, after averaging declines of 17% in the previous month. We have no qualms about riding a rally, as long as a stock remains reasonably valued—which brings us to the last key sign of health.

5. Low premium. Thermo Fisher trades at 22 times trailing earnings, 11% below the median for life-sciences companies in the S&P 1500 Index and 24% below its own three-year average.”

Bottom Line on TMO

And, indeed, as Richard Moroney predicted, Thermo Fisher had a banner fourth quarter, posting adjusted earnings of $3.25 per share, up 16%, and beating estimates of $3.19. Revenue also saw a healthy increase, up 8%, to $6.51 billion, topping estimates of $6.24 billion.

Analytical instruments led the sales charge, rising 11%, followed by the life sciences solutions and laboratory products/services businesses, which both grew 8%.

Looking forward, analysts are very optimistic about TMO’s growth prospects, with two analysts increasing their EPS forecasts in the past 30 days.

Thermo Fisher Scientific looks interesting on a number of levels, including industry dynamics, valuation and growth potential. It’s a solid medtech stock to consider.

Nancy Zambell

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Nancy Zambell, Editor of Wall Street’s Best Investments, has spent 30 years helping investors navigate the minefields of the financial industry. Nancy scours more than 200 advisories and research reports to select the top recommendations, which she collects for you in this easy-to-read digest.

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