TMO and MTD were laggards last week, pulling the relative PE closer to historic norms. Given the 200bps of outperformance, the group’s EV/EBITDA premium to the market remains inflated at 57% (Exhibit 25). Since 1/23, Tools as a group is down -18% cap-weighted (wide, but narrowing variation in the group, see Exhibit 7) vs the S&P -24% and Devices -20%.
Search Coverage List, Models & Reports
Search Results1-10 out of 42
The lack of high frequency data in Tools makes assessing trends amidst the current crisis challenging relative to many other industries. To attempt to bookend the possibilities, we reconstructed our customer-level GTMI series to take a look back to 1995 – through multiple recessionary cycles – to inform views on potential impacts of recession on Tools estimates. Our series reflect hard data including pharma production volumes, medical equipment production, and testing instrument production that have passed GTMI statistical filters. Our findings are presented on pages 2 and 3. In coming weeks, we will launch a set of new higher frequency tools as we attempt to compare the current cycle to prior cycles for modeling purposes.
We refresh our data-driven look at Tools positioning in the current environment, looking at fundamentals and recent moves, following on our China Updates. Tools as a category has multiples (even on stale consensus) near 1H19 peaks vs the S&P, up 1,500 bps in 2 weeks on EV/EBITDA, to 61% from 45%, (Exhibit 5). Since 1/23, Tools as a group is -22% cap-weighted (wide variation in the group, see below) vs the S&P -28% and Devices -25%.
As we catch up with Tools co’s into quarter-end, companies are generally reluctant to be specific on 1Q, but themes are emerging. High level, we sense there is general agreement with our view that 1Q results likely land over 300bps below plan at the top line in many cases (smaller for companies with COVID in guidance; recall ALGN reiterated 1Q last week), with a wide degree of variation. Specific commentary on 2Q is nil. Companies with higher instrumentation exposures are most uncertain (see Exhibit 1 as well as Slide 4 in our COVID slides linked above). At the same time, the phrase “China is coming back” has been spoken more than once in our discussions, and there is a confidence that WW activity levels will recover over the course of 2H; both reassuring on one hand and concerning on the other as this implies expense controls will be limited and decremental margins therefore elevated. Interestingly, the fluidity of the COVID situation mutes the appropriateness of preannouncements, which could prove wrong on 2 weeks of progression. All-in, it feels like 2Q will be tougher than 1Q, even with 1Q below guidance for companies that guided with COVID in the numbers, as EU/US impacts are emergent and China disruption was more persistent than guided.
Aside from Agilent, where expectations were set for the April quarter to see ~-9% pressure on APAC sales from COVID-19 (Agilent is the only co in the group with a Jan-April quarter), there is limited commentary on the impact anticipated for Tools co’s. In Dental, XRAY guided for ~-70% pressure on APAC. This report aims to synthesize updates from a range of other healthcare/testing co’s, to approach a base expectation for 1Q; our discussions with Tools co’s find a view that sales likely see 2-5% pressure relative to expects, and for equipment-heavy players, these numbers would be larger.
In the near-term, exposures to the following are concerning for non-therapeutic Healthco’s: discretionary healthcare (exposed to hospital resource reallocation), applied/industrial (see: cyclical end markets) APAC, and instruments. We attempt, with admittedly limited visibility and an appreciation that we are perhaps nearer to the beginning than the ending of a challenging period, to quantify exposures on these metrics and consider which companies’ consensus figures have adjusted to contemplate these exposures. Our effort is admittedly tactical in nature, and the extent to which structural changes emerge from the current COVID-19 challenges persist is an unknown.
We move to No Rating after TMO’s announcement to buy QGEN. We are moving to No Rating on QGEN from Outperform given that the stock is no longer trading on fundamentals due to the announced acquisition of the company by Thermo Fisher Scientific. For our thoughts on the deal, and our latest merger model, please see our TMO report.
Our acquisition model for TMO’s purchase of QGEN details accretion to EPS and EBITDA through synergies generated over a 5-year period, assuming a 1H21 close. We also break out the projected size of any Sample Prep divestitures that come as a result of the acquisition.
In ‘17-‘19, China at ~10-20% of sales for Tools coverage accounted for 60-132bps of the 6.6% Tools organic CAGR. Slowing China since mid ‘19 (-1100bps of % growth on aggregate; Exhibit 5) prompted our analysis of federal revenue and spend trends to assess the long-cycle trends underlying the decel that was also flagged by our GTMIs last summer. We find that Govt spending in China health/science categories rarely decouples from spending aggregate growth, which has slowed, and appears at risk given a falloff in tax/tariff revenue growth as GDP slows and tariffs have an impact. Coronavirus likely confounds assessment of near-term trends, but the glide path is slowing on the back of macro, policy, and tariff concerns. We remain cautious on the group multiple on category deceleration; valuation details on page 7.
We continue to anticipate >MSD growth top line in ’21-’22, driven by the fade of a series of headwinds and the scale-up of QIAStat, with upside optionality from dPCR (QIAcuity) and NeuMoDx (not in our model). Specifically, headwinds in ’20 include -$10-$15Mn (-80bps) in Comp. Dx in 1H, the NexTel Biotechnologies divestiture (-30bps), GeneReader termination (-40bps), HPV business expected to be down -70bps after a flat ’19, or a total of -220bps of headwinds that fade by 4Q20. We cut our sales estimates by -1% for ‘20/’21, but raise ‘20/’21 EPS 2-4% on reduced R&D expenses post-NGS divestiture and improved tax efficiencies. PT unchanged at $43 based on a FCF yield of 4.5%, which compares to our Tools average (ex-ILMN) at 3.2%, to embed risk cushion given ongoing transitions. Maintain Outperform.
- 1 of 5
- next →