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Thermo Fisher Scientific: Analyzing the Implications of the Olink Acquisition

Thermo Fisher Scientific: Analyzing the Implications of the Olink Acquisition

Thermo Fisher Scientific (NYSE:TMO) has experienced a turbulent year, with its stock fluctuating between $500 and $600. Despite this volatility, Thermo remains a high-quality company that has achieved significant growth through strategic acquisitions. With its expansion into Life Sciences and services like contract research and manufacturing, Thermo has positioned itself as a leader in the industry. The company’s growth was further fueled by increased demand for PCR testing equipment and other tools during the Covid pandemic.

However, as Thermo reported its financial results for 2023, it became clear that the company faced headwinds. The decline in Covid-related sales and a challenging macroeconomic environment impacted Thermo’s earnings, leading to a downward revision of its EPS guidance. Although Thermo’s organic growth is expected to offset these challenges in the long term, the company’s valuation is now more in line with its growth prospects.

Troublesome Prospects for Olink Acquisition

Thermo’s recent announcement of its acquisition of Olink Holding (NASDAQ:OLK) for $26/ADR raises questions about the impact of this deal on the company’s growth targets. Olink, a Swedish company focused on proteomics, offers diagnostic kits, analyzers, and interpretive software for the study of proteins. This acquisition aligns with Thermo’s Life Sciences division and strengthens its position as a comprehensive provider of scientific solutions. However, Olink’s growth has slowed, and its revenue forecast for 2024 is only slightly above 2023 guidance.

In addition, Thermo’s earnings per share is expected to be minimally affected by the acquisition. By year 5 after the deal’s closure, Thermo forecasts the acquisition to add only $0.32 per share. This represents a marginal increase of 1%-2% in the company’s earnings. Furthermore, considering the deal’s high valuation and the challenges posed by integrating Olink into Thermo’s operations, the acquisition does not significantly alter the overall valuation of the company.

Valuation and Financial Insights

Based on an updated discounted cash flow (DCF) analysis, Thermo’s valuation remains relatively unchanged since the previous year. The decline in earnings for 2023 and 2024 is offset by a higher terminal growth rate assumption. The resulting valuation per share is $535.84, with a minor decrease to $492.52 if the terminal growth rate is adjusted downwards. These values reflect little change from the previous valuation, indicating that Thermo’s stock price is currently in line with its intrinsic value.

In terms of capital management, Thermo Fisher has maintained a prudent debt level in the past. However, the company’s net debt/EBITDA ratio has increased to 2.9 times, primarily due to decreased cash and higher interest expense. Thermo will need to refinance its upcoming debt maturities at potentially higher rates. Despite these challenges, Thermo Fisher has demonstrated its commitment to capital returns through consistent share buybacks and a steady dividend.

Conclusion: Limited Upside Potential

While Thermo Fisher Scientific has a strong track record of successful acquisitions, the Olink deal does not appear to be a game-changer for the company’s growth targets. The premium paid for Olink and the limited impact on Thermo’s earnings make the acquisition less compelling. Olink’s shareholders may consider selling their shares given the little room for further upside. Thermo’s current valuation, at approximately 21.5 times 2023 earnings and 19.9 times 2024 earnings, is reasonable considering the company’s growth prospects. However, based on the updated DCF analysis, the stock offers only about 10.5% upside to fair value, leading to a cautious “Buy” rating.