Thermo Fisher Earnings: Rare Miss and Likely Softer Environment in the Near Term

We are maintaining our $600 fair value estimate for wide-moat Thermo Fisher TMO following its second-quarter results. The company delivered a rare below-expectations performance as China activity decelerated and demand softened across the developed markets. Our forecasts for revenue and earnings were slightly below the consensus estimates but still above the updated company guidance. 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 was not entirely unexpected. In the prior quarter, the company defied expectations with a strong base business growth despite many competitors reporting end markets weakness. This quarter, we finally saw evidence that Thermo Fisher isn’t entirely immune from the industrywide pressures. The core business relative softness (still growing slightly) came from both the developed markets’ more cautious spending and a meaningful deceleration in China, particularly on the bioproduction side. The updated guidance for the remainder of the year implies a similar environment. For us, the bigger question is whether this lower revenue growth profile will extend 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. Long-term demand forecast by Thermo Fisher is 4%-6%, but it wouldn’t be surprising if the environment is more challenging beyond 2023. 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 is targeting incremental $450 million in cost reductions, which should help offset lower volume pull through.