Thermo Fisher Scientific (NYSE:TMO) is a one-stop supplier for research labs around the world. Fisher Scientific's 100-year-old business as the top seller of core laboratory consumable products which are crucial to every research lab complements Thermo Electron's sales of high-tech bioanalytic instruments, which are an expensive one-time purchase but require consumables to operate.

Its diverse portfolio of products also shields TMO from dependence on the spending patterns of its customers and their public and private funders. The sales of core lab consumables (unlike bioanalytic equipment) do not depend on fluctuating research budgets, providing TMO with protection against these fluctuations.

Company Overview

Business Financials

In 2009, TMO earned a total of $10.1 billion in total revenues. This was a decline from its 2008 total revenues of $10.6 billion. Unsurprisingly, as a result in the decline in revenues TMO's net income was adversely affected. Between 2008 and 2009, TMO's net income declined from $989 million in 2008 to $850 million in 2009.[1]

Business Segments

Thermo Fisher Scientific is the result of a 2006 merger between Thermo Electron and Fisher Scientific. TMO's business is now divided into two main segments:

Analytical Technologies

This segment sells lab instruments, diagnostic devices, software and services to pharmaceutical, biotechnology, and academic laboratories. This segment has continued the business of Thermo Electron before the merger. In addition, TMO develops and sells high-tech detection equipment for uses in air quality monitoring, radiation detection, as well as equipment used in safety monitoring at airports and border patrols for the prevention of terrorism. [2]

Laboratory Products and Services

This segment sells consumables that are disposable commodities used in the everyday operations of labs. This segment has continued the core business of Fisher Scientific before the merger and still maintains a separate website to maintain customer loyalty. The Fisher Scientific catalog has been published for over 100 years and is the largest provider of core laboratory equipment and services to research labs around the world. [3]

Trends and Forces

TMO's Bioanalytic instruments face are becoming outdated

TMO's bioanalytic technologies division faces significant competition from many other firms that specialize in producing innovative bioanalytic instruments. Specifically, key competitor Agilent Technologies (A) has actively produced new mass spectrometry technologies, while TMO has focused on developing new chromatography equipment while maintaining its current technology for mass spectrometry analytic instruments. If the firm cannot develop a suitable competitor to Agilon's product, TMO may see a loss of sales revenue in the analytic technologies division as potential customers opt for the newer technology. [4]

Core lab consumables face commoditization and increased competition

Fisher Scientific's laboratory consumables catalog has been published for over 100 years, and its products before the TMO merger had a loyal following in research institutions around the world. The merger with Thermo Electron placed pressure on this brand reputation, while the low costs of producing these products invites increasing competition. Specifically its main competitor VWR International threatens to take market share. Customer loyalty is very important in the laboratory consumables business, where the products are essentially commodities that differ only in brand name.

TMO's sensitive detection equipment is exposed to liability issues

TMO currently provides detection equipment in various airports, embassies, border crossings, etc., for protection against explosives and prevention of terrorist acts . [5] Malfunction of this equipment could cause such restricted materials to pass through undetected and incur liability claims against TMO. TMO's current liability insurance does not cover against such claims; additionally, TMO may lose a large part of their clientele if such a product malfunction were to become publicized. [6]

TMO revenues will fluctuate according to capital spending patterns of customers

TMO's customers often stock up on lab consumables and equipment at the end of the year, when funding is abundant (NIH funding is distributed to labs towards the end of the calendar year). TMO's revenues thus fluctuate throughout the year and are strongest in the last quarter of the calendar year. NIH funding is not completely stable, either - economic pressures may result in a stagnation of NIH funding, which has been growing at 2-3% in the past few years but is not expected to increase in the near future. TMO's customers from academic and government research labs are directly affected by the limitations of NIH grant funding; a lack of funding results in fewer laboratory product and equipment purchases and adversely affects TMO's sales revenues. [7]

Competition and Market Share

TMO's two main product divisions, analytic technologies and consumable laboratory products, are in direct competition with many other companies in the industry. In particular, its portfolio of bioanalytic instruments faces stiff competition. However, it is the top seller in consumable laboratory equipment, with only one other significant competitor. Some of its top competitors include Agilent Technologies (A), Becton, Dickinson and Company (BDX), and Beckman Coulter (BEC).

hi augusta, Everyone does this type of thing diflerentfy so I don't exactly know what you mean by margin of safety. Basically using a P/E of 11x and an EPS growth rate of 9%, I get $48.41 as a fair price to pay for Sun Life. So I guess $45.00 would be a margin of safety of 7% and the price i actually bought at ($38.60) would be a MOS of 20%.

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