Thermo Fisher Scientific

Of gold diggers' shovels and medical devices

Let's take a little trip back in time: it's January 24, 1848. The emigrant James W. Marshall finds the first gold nugget (worth 5 dollars at the time) while building a sawmill near Sacramento. Despite his attempt to keep his good fortune secret, a newspaper publisher publishes an article about Marshall's find, triggering the great California Gold Rush. Within a year, 80,000 people came to dig for their fortune. Of course, not all of them were successful, and many gave up their search in disappointment.

Now let's do a little thought experiment: as investors back then, we could have put our money into 2 parties - the gold diggers themselves or the sellers of gold-digging equipment. Of course, with a bit of luck we could have picked a resourceful fellow, but we probably would have had much more success with the shovel seller. Why should we act any differently today?

The origins and business model of Thermo Fisher Scientific Inc.

Thermo Fisher Scientific Inc. was created from the merger of the Thermo Electron Corporation and Fisher Scientific International Inc. in 2006. Let's first take a look at the origins of the much older Fisher Scientific. Chester Garfield Fisher was born on August 10, 1881. He studied mechanical engineering at the University of Pittsburgh and quite quickly recognized the need for a company that would supply scientific tools to the city's various industries, especially the booming steel industry. He was just 19 years old when he bought a storeroom of laboratory supplies from the Pittsburgh Testing Laboratory. But since he was still too young to get financing himself, friends of the family signed the papers. At 21, everything was finally transferred to him, and the young engineer was able to found his Scientific Materials Company.

The company was the first commercial source of equipment and reagents for laboratories in the entire region. At that time, very few instruments were available, and most chemists had to rely mainly on their eyes for their analyses. Fisher, who now supplied products such as microscopes, burettes, pipettes, litmus, colorimeters and scales, enabled researchers to perform much better and more precise visual analysis. His business was booming, and Fisher kept adding more products to his range. In 1904, he published his first 400-page catalog with all kinds of lab supplies, dissection kits and anatomical models. When his supply chain to his European manufacturers was cut off in World War I, he promptly set up his own first research, development and production facilities himself. To the delight of his customers, he was able to significantly improve the quality and innovation of his products. To stand out from his similar-sounding competitors, in 1926, after acquiring Scientific Supplies Limited, Fisher changed his company name to Fisher Scientific Company.

Now let's briefly look at the founding story of the Thermo Electron Corporation. On January 7, 1927, George Nicholas Hatsopoulos was born in a suburb of Athens. When the Nazis invaded Greece in World War II, he was 14 years old. It was at that time that he developed his interest in electronics. He secretly modified radios so they could receive Allied frequencies. An illegal practice that could have landed him in a concentration camp. He sold his devices to the Greek underground. After the war, it was clear to Hatsopoulos that he wanted to study electrical engineering. When he realized he couldn't learn anything more in Athens, he moved to Cambridge to study at the Massachusetts Institute of Technology. There he was introduced to thermodynamics and quickly recognized the potential slumbering in it. While still a student, he negotiated a loan of $50,000 to found the Thermo Electron Corporation.

In the early days, the company was still based in a garage, where Hatsopoulos could do his research undisturbed. Later he hired his brother John, who was to take care of all financial matters. The young tinkerer focused on thermodynamics, the conversion of heat into electricity without the help of moving parts. Inspired by his visionary research results, around 30 other well-known companies decided to get into thermodynamics - including giants like General Electric and General Dynamics. Thermo Electron Corp. also developed wonderfully over the years. In 2006, it finally merged with the Fisher Scientific Company. Together as Thermo Fisher Scientific, the company made several smart acquisitions and is now extremely well positioned in lab supplies, consumables, as well as diagnostic software and research services for the healthcare industry.

How will Thermo Fisher Scientific fare in the future?

I'm sure that Thermo Fisher Scientific can continue to develop wonderfully over the next years and decades. Besides Danaher and Abbott Laboratories, there's hardly a company that can even come close to holding a candle to Thermo Fisher. Over the years, it has built up a nearly insurmountable moat. Thanks in part to its numerous acquisitions (the takeover of the German biotech company Qiagen is currently underway), it is today extremely well represented in almost all areas of scientific work and can keep investing massively here.

Thermo Fisher's customers include not only biotech and other pharmaceutical companies, but also universities and government research institutions. The staff at these institutions have known and used Thermo Fisher products for many years. More precisely, the company is represented with its main brands Thermo Scientific, Applied Biosystems, Invitrogen, Fisher Scientific, Unity Lab Services and many more. Switching to another manufacturer would therefore also involve staff training costs. Apart from that, there's hardly any reason to switch. Customers are happy with Thermo Fisher and stay loyal to the company in the long run.

With rising prosperity in many developing countries, medical care in these regions will also improve. So sooner or later, there will be innovative research institutions and laboratories of their own there too, equipped with Thermo Fisher Scientific instruments and consumables. Rising prosperity also often goes hand in hand with a higher standard of living - meaning people live longer. And older people generally need several medical therapies and treatments, which again brings money into Thermo Fisher's coffers.

And what about the dividend?

Well, you have to admit quite clearly that Thermo Fisher Scientific is currently putting its main focus squarely on growth and definitely NOT on the dividend. For a very long time in the company's history, it therefore paid no dividend at all to its shareholders. Only since 2012 has it been paid quarterly, albeit not on a large scale. The current dividend yield is a measly 0.2 percent - but the payout ratio is also extremely low at 9 percent. I'm sure the day will come here too when the company starts paying out more to its investors.

Conclusion:
Thermo Fisher Scientific, by its own account the "world's largest supplier for scientific applications," has developed wonderfully in the past. From my point of view, there's nothing to suggest it doesn't have an equally successful future ahead of it. Anyone who wants to invest their money for the long term is well served here. Pure dividend investors, on the other hand, will probably find more lucrative investment opportunities.