One idea from Barron’s – Thermo Fisher

A Thermo Fisher Scientific X Series 2 mass spectrometer. Brent Lewin/Bloomberg

Scientists don’t seem thrilled about the next White House tenant. He’s “the first antiscience president we have ever had,” a spokesman for the American Physical Society in Washington, D.C., told the journal Nature.

OK, so Donald J. Trump tweeted in 2012 that “the concept of global warming was created by and for the Chinese.” Vice President-Elect Mike Pence wrote in 2001 that “smoking doesn’t kill,” and he staunchly opposes embryonic stem-cell research. Oh, and Trump last year told far-right radio host Michael Savage that he hears “terrible” things about the National Institutes of Health. So why, then, did shares of Thermo Fisher Scientific (ticker: TMO), a top seller of laboratory gear and a key beneficiary of NIH spending, move up 3.2% this past week?

One reason is that NIH funding looks not only secure, but also headed higher. And Thermo Fisher is likely to grow its earnings per share at a double-digit clip for years to come. Its shares have returned more than 25% since we recommended them just over two years ago (“Thermo Fisher: Riding the Research Boom,” Aug. 30, 2014). They could add another 30% over the coming two years.

The NIH is the world’s largest public funder of biomedical research, with a yearly budget of $32 billion, more than 80% of which is spent on grants at thousands of universities and other lab facilities. Funding is controlled by subcommittees led by two Republicans, Sen. Roy Blunt of Missouri and Rep. Tom Cole of Oklahoma, both re-elected on Tuesday. Here’s Cole in a speech this past March: “The most important thing, as Roy has already said, is to make sure that the $2 billion increase in 2016 is not a one-hit wonder. We want this to become a regular pattern for Congress, to make these NIH investments in a regular, manageable, and predictable way so that the scientific community knows they will continue.”

That doesn’t sound like a government that’s angry at science, nor should it be. NIH grants reach more than 300,000 workers. Much of the work is basic research, the results of which often get snapped up by companies to create health advances, profits, and more jobs. The NIH’s budget is a modest 0.8% of federal spending.

Thermo Fisher shares sold off from $160 in October to $146 before the election, after smaller rival Waters (WAT) reported weak demand from U.S. academic customers. The spending pullback looks temporary, according to Paul Knight, an analyst at financial-services firm Janney Montgomery Scott. Academics hold off on buying, say, $500,000 mass spectrometers leading up to elections to make sure they don’t have to cut jobs in the event of a government deadlock that blocks funding. Moving into 2017, Knight sees potential for a healthy rebound in academic purchases.

Academic and government customers contribute 25% of Thermo Fisher’s revenue. The rest is divided fairly evenly among industrial concerns like oil producers, medical and diagnostics companies, and drug developers. This year, Thermo Fisher is expected to generate 4.5% revenue growth, not counting acquisitions. Wall Street predicts total revenue, including acquisitions, to rise 8%, to $18.31 billion, with earnings growing 11%, to $3.28 billion, and earnings per share, 12%, to $8.25, adjusted for one-time charges like write-downs from acquisitions. That puts shares, recently $151.25, at 18.3 times earnings, on par with the Standard & Poor’s 500 index. On average over the past 15 years, Thermo Fisher has traded at a 10% premium to the index.

NEARLY TWO-THIRDS of Thermo Fisher’s revenue comes from consumable products, giving investors good visibility. Growth opportunities abound. With some $700 million in yearly spending on research and development, Thermo Fisher is focused on making new equipment for gene analysis, portable machines that take the place of bulky ones, new ways to test for allergies and drug abuse, and more. The top three players in the industry control only about a third of yearly revenue estimated at $100 billion. The rest goes to hundreds of smaller players. Thermo Fisher has a record of spending most of its free cash flow, pegged at $2.72 billion this year, on takeovers.

Two things could go wrong for Thermo Fisher. One is a rise in global trade wars. Just over half of company revenue comes from North America and about a quarter from Europe. But the company has been expanding in markets with faster growth potential, such as China, India, and Latin America. Emerging markets now contribute 19% of revenue. The other is a slump in health-care profits. On the first point, hopefully cooler heads will prevail, except in cases where hotheadedness is warranted, like China’s steel dumping. On the second, health-care companies that run out of room to raise prices willy-nilly could end up needing more research, not less. Meanwhile, some industries that Thermo serves, like oil production and steel-making, could gradually pull out of ongoing slumps.

By 2020, analysts reckon that Thermo Fisher could earn close to $13 a share. Distant forecasts are unreliable, of course, but Thermo has beaten earnings estimates each quarter over the past five years. The dividend is too small to mention. That means it is also too small to have attracted income investors, who could flee high-yielding stocks for bonds as yields rise. A 30% rise over the next two years could leave shares at 18 times forward earnings estimates, or a touch less, assuming that Thermo Fisher continues modestly beating estimates.