From discovering new treatments for chronic diseases to understanding climate change, innovation in science is essential for economic development and addressing some of the world’s greatest societal challenges.
Current holding Thermo Fisher is doing just that: by accelerating life sciences research, solving complex analytical challenges, improving patient diagnostics, delivering medicines to market and increasing laboratory productivity, the company is helping its customers find answers to the most pressing issues of our time. Thermo Fisher’s products are used across pharmaceutical, biotechnology, academic, government, environmental and industrial research, as well as the clinical laboratory.
For example, in 2017 Thermo Fisher formed a partnership with Mars Inc. to tackle aflatoxins – naturally occurring poisons that contaminate an estimated 25% of food crops and 4.5bn people worldwide1. Aflatoxins originate in certain species of fungi that grow on feed and food, such as groundnuts, peanuts, spices and corn. They are near-impossible to destroy and are considered a Class 1 carcinogen by the International Agency for Research on Cancer. Together with Mars, Thermo Fisher aims to identify a protein to reduce the impact of the aflatoxin in food. Such a development would have a positive societal impact, particularly in developing countries, where the amount of aflatoxins in food products is not well regulated.
A combination of attractive fundamentals
Thermo Fisher’s commitment to innovation and its ability to meet rising healthcare needs globally is compelling, but it boasts a combination of attractive long-term fundamentals too.
Thermo Fisher enjoys strong and stable growth as well as good and improving margins. In 2017, emerging markets accounted for 24% of its full-year revenues. What’s more, it is attractively valued (see Figure 2) and has strong governance structures.
Figure 1. Gaining ground: shares in Thermo Fisher have risen steadily since 2012
Source: Bloomberg as at February 2019.
The diversified nature of the company’s product portfolio means that it enjoys a competitive advantage from scale. Indeed, no single product or end-market materially impact its performance. In addition, the company targets an organic revenue growth rate of 4-6% and an earnings per share of about 12-15% per annum, reflecting its cost-cutting culture and process improvements.
Figure 2. The Alpha Model views Thermo Fisher as attractive
Source: Factset and Hermes as at December 2018.
Encouragingly, the company also generates a significant portion of its revenue through activities that have a positive social and environmental impact, such as access to healthcare or sustainable solutions that help customers reduce its environmental footprint. It offers 45 ‘greener’ products, which strive to provide customers with alternatives that are less hazardous, more energy efficient and reduce waste.
Thermo Fisher is also contributing to the UN Sustainable Development Goals. Its diagnostic tools are helping achieve the SDGs by diagnosing some of the world’s most infectious diseases. In addition, the company produces environmental tools and IT systems, such as soil analysers that help produce healthier and safer crops, water analysers that help deliver safe drinking water, and air quality measurement tools that help track pollutants and assist industrial manufacturing monitor compliance.
It is for these reasons that our proprietary Alpha Model views Thermo Fisher as a very attractive long-term investment in a diversified portfolio (see Figure 2) – and why we decided to take a long-term position in the company (more than five years ago). The company ranks ahead of its peers in the six factors – valuation, corporate behaviour, growth, profitability, capital structure and sentiment – used to generate our Alpha Score. It is broadly neutral to some of the underlying factors within corporate behaviour. Understandably, sentiment towards Thermo Fisher is strong.