Fisher Scientific

[tucker]

Fisher Scientific (FSH)
Recent Price: $66.53
Revenue: $5.58bil
Market Cap: $8.22bil
EPS: $3.05
Shares Outstanding: 123.5mil
P/E: 21.80
Avg. Volume: 953,639 (NYSE)
Dividend: --
Book value: $34.88
Yield: --

Fisher Scientific is the world’s leading supplier of research equipment for scientific and clinical laboratories. The business is divided into three sections: Scientific Products and Services (73% of sales), Healthcare Products and Services (23% of sales), and Laboratory Workstations (4% of sales). The Scientific Products and Services division manufactures and distributes both consumables (chemicals, sera, reagents, and media) and non-consumables (instruments and equipment), and provides research services to biotechnology and pharmaceutical companies engaged in clinical trials. The Healthcare Products and Services division provides diagnostic kits, reagents, equipment, instruments and consumables to hospitals and group purchasing agents, and provides controls and calibrators for the pharmaceutical and healthcare industries. The Laboratory Workstations division is the world’s largest provider of laboratory casework, countertops, and airflow products. If you took a chemistry class at the university you probably worked under a Fisher fume hood. In total, approximately 80% of Fisher Scientific’s sales are from consumables. Fisher has customers in more than 150 countries.

Most RainFrog partners would agree that scientific research is generally an ethical investment. However, like most companies of its size and age (Fisher Scientific was founded in 1902), Fisher has faced ethical challenges. In 2000, three employees of a Fisher Scientific facility in Homer City, Indiana files suit against the company claiming that exposure to asbestos while on the job has been caused their incurable mesothelioma. This was sufficient to keep Fisher from passing the environmental screen set by Calvert Funds, which is often less stringent than the standard to which RainFrog holds its investments. However, while the suit for past asbestos exposure continues, it seems that Fisher has modified the facility to prevent future exposure. In July of 2005 Fisher was cleared for investment by KLD, the research organization that serves Domini Funds, and the company was cited in particular for its environmental management work. In 2005 the Interfaith Center on Corporate Responsibility introduced a shareholder resolution asking Fisher Scientific to ban workplace discrimination based on sexual orientation at all of its facilities, but the resolution was withdrawn when Fisher amended its employee code of conduct to include the requested ban, and the resolution never went before the shareholders.

Over the past three years, Fisher has made several acquisitions. In 2003 the company acquired Swedish scientific chemical company Perbio Science, and in 2004 they acquired UK diagnostics manufacturer Oxoid Group Holdings and Dharmacon, Inc., a Colorado company specializing in RNA processing products. By far their biggest acquisition was the $3.9 billion purchase of Apogent Technologies in August of 2004, which added microscopes, glassware, and related products such as shakers and stirrers to Fisher’s line. These acquisitions have allowed Fisher to focus more on its Scientific Products and Services and Healthcare Products and Services divisions, and some analysts expect the company to divest its relatively less profitable Laboratory Workstation business this year. This and the continued integration of Apogent are expect to raise profit margins by 1% in 2006, while revenue is expected to grow at 8% in Scientific Products and Services and 5% in Healthcare Products and Services. Fisher expects further strategic acquisitions to help continue the company’s transformation from primarily a distributor to a manufacturer and distributor, and an increasing emphasis on proprietary products should continue to improve operating margins in the near future.

The downside to Fisher’s recent pattern of acquisitions has been growing debt, which stood at $1.8 billion at the end of 2005. This has led Fisher to a somewhat lower return on invested capital (ROIC) than some of its peers. Any significant slowdown in research spending could significantly impair the company’s profitability. However, even under a US administration that is generally considered to be somewhat hostile to the pure sciences, Fisher has managed to more than double revenue in the past five years, and strong positive cash flow may partially offset concern over the company’s debt.

Fisher Scientific is highly regarded by the analysts, who give the company a rating of 1.8 (1=strong buy, 5=strong sell, S&P 500 mean 2.46). The company has shown average earnings per share (EPS) growth of 29.4% over the past five years, and a doubling of share price over the same period. Analysts expect the company to continue to grow at 15% annually over the next five years, and mean 12-month target price is $78.88 per share. If the company eventually trades at a P/E of 20, analyst target price does not seem unreasonable. However, it should be noted that the company will have to grow at at least 12% to justify its current price, and maintaining that rate will become progressively more challenging as the company continues to mature in its focal market.

[pitto]

Many thanks to Tucker for his seemingly endless supply of research that he puts out nearly every month. After reading through the research on both Fisher Scientific and Sigma-Aldrich (I'll post this on the Sigma-Aldrich research as well) I didn't have any objections except for one thing that made me squirm a bit but may or may not be an issue with these specific companies. The issue I'm talking about is their involvement with the biotechnology industry.

The biotech industry is certainly not unknown to RainFrog. We invested in a biotech company called Genencor until Feb of last year and I believe we'd still be investing in it if they hadn't been bought by another company. I, myself, am certainly not anti-biotech per se but I am wary of it and I am not a supporter of the hundreds of thousands of acres of genetically modified crops that are slowly creeping across the planet. That being said, I am a supporter of genetic modification if such products/experiments are contained within an isolated system as opposed to being unleashed into our environment.

After a little (just a little mind you) research of my own, I haven't been able to find out how directly, if at all, both Fisher Scientific and Sigma-Aldrich's products are involved in the production of GMOs sold by companies like Monsanto, Sygenta et al. The names of the companies when searched for together show up together but the connection between them remains ambiguous to me.

For some of us at RainFrog this may not be an issue but I thought it should be mentioned just in case it is an issue for others.

Tucker, I wonder if there is any way of getting more specific information on what companies Fisher Scientific and Sigma-Aldrich sell their products to and how those products are used. Also, are any of their products used as agricultural chemicals? If you have ideas on where I could look I could do some searching myself.

Joey

[tucker]

A good place to start looking for information on a company's products is the annual report, which is usually available on the company's web site.

Fisher doesn't disclose their customers, but for the most part they are what we might call a "pure research" supplier. They really don't do much in the way of supplying the raw materials or equipment for the manufacture of agricultural chemicals, or anything else for that matter. On the other hand there is hardly a research lab in North America or Europe that doesn't rely on Fisher for something, and they have a growing presence in Asia. Even my lab here at UW, which is very theoretical and does more with computer models than chemicals, contracts with Fisher to maintain our microscopes. I am sure the labs at Monsanto and Syngenta rely on Fisher as well.

For my part, I am inclined to take the good with the bad when it comes to scientific supplies. (Within certian reasonable limits that is - my research on PerkinElmer came to a rapid end when I found that among their optical instruments was a small product designed for triggering land mines!) I see investment in Fisher as supporting pure knowledge. There is the potential of course for any knowledge to be misused. My internal SRI screen falls between the companies that create knowledge and those that apply it unethically.

[pitto]

By what you tell me and what I've found on my own, there doesn't seem to be any reason to worry about investing in Fisher in terms of it's products and customers. When I brought it up I was worried that they may be more directly involved with companies that have a markedly unethical track record. After a little more research and your reply there is nothing on record that would have me believe that is the case.

Thanks for your reply,
Joey