Thermo Fisher Scientific

This is The Conviction Play. Thermo Fisher Scientific, life-sciences instruments and reagents.

If modern science and medicine are a gold rush, Thermo Fisher sells the picks and shovels. It is the largest supplier in the world of the ordinary equipment that makes research and drug-making possible. The chemical reagents. The disposable plastics a laboratory gets through by the crate. The instruments. And increasingly the outsourced manufacturing that biotech firms use instead of building their own plants.

The piece spends its opening on a concept rather than a company, because without it the rest does not parse. Most businesses grow more or less steadily. A cyclical rises and falls in waves tied to its industry's own boom and bust. When times are good demand surges and profits balloon. When they turn, both go into reverse, and the reported numbers make a healthy business look broken.

Thermo Fisher is a compounder with a cyclical heartbeat, and lately the heartbeat has been beating hard. Its customers are research labs, biotech firms and drug manufacturers, and their spending rises and falls with funding and confidence. When money poured into biotech they bought instruments and stockpiled supplies. Then they stopped buying and worked through what they already owned.

Three questions settle which of those you are looking at. Is the lost demand merely delayed or genuinely gone. Did the underlying science pause. And is the cash still coming in. On all three the weight of evidence points to a trough. The destocking was customers using up supplies they had already bought, demand postponed rather than destroyed, and the science never stopped.

On our map it belongs to health and wellbeing, in the precision diagnostics and testing theme, where diagnosis moves earlier and gets more specific and the money sits in the consumable used up on every test rather than the machine that reads it. Thermo Fisher supplies both, which is rather the point.

The bears have one good argument and the piece gives it room: that part of the weakness is not cyclical at all. Pressure on American government and university research funding, tighter grants and budget uncertainty, could be a lasting drag on that slice of demand rather than a passing one. A pristine compounder asks one thing of a buyer. A cyclical compounder asks two: that the recovery prove itself, and separately that the entry leave room to be wrong.

It is assessed as a free-cash-flow compounder rather than on the earnings-line basis the exceptional grade uses, so it sits outside the series on the method rather than on the merits.

One disclosure. The author holds no position in Thermo Fisher Scientific.

The full piece on Thermo Fisher Scientific is on the site, with the twelve-year earnings record as a chart. Free, no email address, no paywall, at the conviction play dot com.

A note before we finish. This episode is narrated by a synthetic voice, not by the author. It is an assessment of business quality, not a view on the share price: nothing here is a valuation, a price target, or a recommendation to buy or sell anything. A company that does not clear our bar can still be a fine business and a fine investment, and we publish what we do not grade, with the reason, because an assessment that only speaks about its winners is marketing. The Conviction Play publishes general commentary for information only. It is not investment advice, and capital is at risk. This reflects what was known on the day it was recorded.

That was Thermo Fisher Scientific, from The Conviction Play. Thank you for listening.