Thermo Fisher Earnings: Delivers Healthy Margins Despite Revenue Pressure

We are maintaining our $600 fair value estimate for wide-moat Thermo Fisher TMO following its third-quarter results. The company is seeing continuing broad market weakness but still managed deliver core organic growth in the quarter. With demand softness likely to persist in the near term, the firm’s approach to costs is impressive, with adjusted operating margin up 200 basis points year over year. We are slightly dialing down our forecasts for revenue; however, the impact of a slightly reduced forecast doesn’t have a material impact on our valuation. We maintain our wide moat rating.

Demand softness wasn’t unexpected as other life science companies called out weaker environment. Bioproduction already started to slip last quarter, and the updated guidance for the remainder of the year implies continuing headwinds. We anticipate the challenging environment to persist beyond 2023. The life science industry has been on an unprecedented bull run, with demand, even if adjusted for the COVID-19-related windfall, well above historic norms. The long-term demand forecast by Thermo Fisher is 4%-6%, and our forecast for 2024 revenue growth is 5%, but with so much demand pulled forward over the past few years, it wouldn’t be entirely surprising to see core business growth come at a lower rate.

With revenue decelerating, Thermo Fisher is doing what it always does—pulling a lever on expenditures. The company saw a robust 200-basis-point margin improvement, mainly on the sales and general expense lines. All segments delivered operating income margin ahead of last year, a remarkable feat in light of flat-ish revenue.