From GS 8/29:
Market Outperformer
Growth
Based on our visit with company management yesterday, we continue to
believe that the company is on-track to achieve its 2002 EPS target of
$0.95-$1.00. The company remains cautious regarding any near-term
recovery in weak demand from certain industrial, life sciences and technology
end-markets. However, the company’s productivity initiatives appear to be
ahead of plan, with the potential to achieve savings significantly in excess of
the company’s $70M savings target. As such, we expect
greater-than-anticipated savings from productivity initiatives to offset any
top-line shortfall due to continued weak end-market demand. We maintain
our diluted cash EPS estimates of $0.95 in 2002 and $1.10 2003 and our
Market Outperformer rating.
PRODUCTIVITY INITIATIVES AHEAD OF PLAN. Based on our
conversations with company management, we believe the company’s
productivity initiatives are progressing more rapidly than originally
expected. Management believes the company will be able to achieve $80M
-$85M in 2002 savings, compared to its original goal of $70M. The
company continues to pursue sourcing and real estate savings, having
exited 47 facilities year-to- date. Management concedes that the easiest
productivity gains have largely been realized and new productivity gains
will require more complex changes. However, management feels the
organization’s ability to drive productivity has developed substantially and
that significant opportunities for additional savings remain. As such, the
company hopes to raise total company EBITA margins to 15% by 2004.
Management hopes to ultimately raise EBITA margins to 20% for the Life &
Laboratory Sciences business, to 15% for the Measurement & Control, and
to 15% for Optical Technologies.
END-MARKET DEMAND RECOVERY REMAINS UNCLEAR. Based on
conversations with management, we remain cautious in our expectations
for a near-term recovery in demand from weak end-markets. For the Life &
Laboratory Sciences business, management noted that demand from
pharma customers for general laboratory equipment remains weak,
although customers continue to be interested in higher-end, higher
performance analytical instruments. In addition, demand from government
and academic customers remains relatively strong. Management also
remains cautious regarding a pick-up in capital spending in weak-end
markets impacting the Measurement & Control and Optical Technologies
businesses, noting sluggish demand from semiconductor equipment,
energy and industrial customers. On a brighter note, management
indicated the Measurement & Control business is seeing exceptionally
strong demand for products addressing homeland security applications and
could benefit from a potential large one-time order targeting this market.
CONTINUED COMMITMENT TO BALANCE SHEET MANAGEMENT. Management remains committed to
repurchasing shares and noted that repurchases have accelerated considerably in 2002 to take advantage of the
company’s lower valuation. Interestingly, management noted that the hurdle for future acquisitions and internal
investments is particularly challenging, as the company analyzes the ROIC of such acquisitions or projects
compared to that of repurchasing Thermo shares. Although management continues to believe that the company is
overcapitalized, the company has scaled back its target net debt /total capital target to 25% 30% from 35%, in
reaction to growing general market and rating agency appreciation for balance sheet conservatism. |
