Thermo Fisher Scientific, Inc. is the global leader in the scientific research market.
- We have long had an interest in the Life Sciences space. Originally, we owned Sybron International, which spun out Apogent Technologies in December 2000. In August 2004, Fisher Scientific International, Inc. merged with Apogent Technologies. Thermo Electron Corporation acquired Fisher Scientific International, Inc. in November 2006. This formed the foundation for the company we know today as Thermo Fisher Scientific.
- Thermo Fisher Scientific is a global diversified leader in the scientific research market.
- We believe Thermo Fisher Scientific will continue to be a key consolidator in the industry. This allows the company to be a one-stop-shop for its customers; thereby increasing buying efficiencies through fewer vendors.
- The management team of Thermo Fisher Scientific allocates capital in a thoughtful, strategic way that continues to create shareholder value through share repurchases, dividends, and strategic/tuck-in acquisitions.
Thermo Fisher Scientific, Inc. is the global leader in the scientific research market. Demographic trends such as aging of the population have helped boost demand for clinical diagnostics and laboratory research supplies. Additionally, the company develops products for use in industrial applications such as air and water analysis, forensic investigation, food safety testing, and radiation and biochemical detection.
Scale and Breadth Are Essential
The company operates across four broad segments: Pharmaceutical and Biotechnology; Academic & Government; Diagnostics & Healthcare; and Industrial & Applied. Serving more than 400,000 customers, Thermo Fisher offers a variety of products from highly advanced analytical instrumentation (mass spectrometry; centrifuges) to consumable items such as surgical gloves and test tubes. To illustrate the importance of this broad product offering we need to look at one of the company’s largest customer bases – pharmaceutical companies. As these companies have experienced increased reimbursement pressures and faced patent expirations, management teams are focused on cost savings through increased supplier consolidation. This plays right into Thermo Fisher’s vision of being a one-stop-shop to help customers control costs through economies of scale.
Strong Allocators of Capital
A talented management team is crucial for Thermo Fisher to use its strong cash flow to drive shareholder-value. To that end, this management team continues to acquire strategic companies that expand its global reach as well as its breadth and depth in core markets and product lines. In addition to a dividend initiated in 2012, the company has been opportunistically focused on share repurchase.
R&D and Funding to Remain Stable Long-Term
The primary investor concerns are potential spending cuts by pharmaceutical manufacturers as well as constrained governmental spending globally, and the future of venture capital funding. First, pharmaceutical pricing has attracted negative headlines following a few “bad apples”. Although industry price increases have moderated, pharmaceutical companies are likely to continue to heavily invest in product pipelines as new drug innovation drives their long-term business viability. Second, European austerity measures and BREXIT create uncertainty; not to mention, the National Institute of Health (NIH) faces proposed budget cuts. Given bi-partisan support for continued health research, we do not believe the NIH budget will be part of a significant cut. Furthermore, the 21st Century Cures bill, passed in 2016, increases spending over the next 10 years to reform drug approvals, allowing for faster commercialization of treatments. Looking outside of the United States, China continues its 13-year plan to invest in precision medicine. Finally, although slowing, venture capital funding continues. Biotech companies have solid cash on hand to continue current pipeline research.
Thermo Fisher Scientific is viewed as the Johnson & Johnson of life sciences. Going forward, given the solid growth profile of the underlying industry, we believe the company will gain market share through continued innovation, strategic acquisitions, global expansion, and higher penetration with its current client-base. Its tenured management team is likely to continue to allocate its strong free cash flow to share repurchases, paying down debt, and acquisitions. As of June 30, 2017, the company traded at $174.47, a 4% discount to our private market value estimate of $182.47.
CBS Corporation is a mass media company that creates and distributes industry-leading content across a variety of platforms to audiences around the world.
- We initiated our position at $25.08 during the second quarter of 2006, shortly after Viacom completed its spinoff of its broadcast television, radio, and outdoor businesses. We believed in CBS’s long term growth strategy and that CBS would continue to produce solid free cash flow.
- Although the media industry is experiencing headwinds such as audience fragmentation and technological changes, CBS has seen an increase in value of quality content due to strong growth in new video distribution platforms. In addition, CBS has been adding to its digital streaming subscription services at better than expected rates.
- Even though advertising dollars are moving away from traditional media to digital, we believe rising video media consumption will meaningfully increase the value of CBS’s content.
CBS Corporation is a mass media company that creates and distributes industry-leading content across a variety of platforms to audiences around the world. CBS owns the most-watched television network in the U.S. and one of the world’s largest libraries of entertainment content. The firm’s operations span virtually every field of media and entertainment, including cable (Showtime and CBS Sports Network), publishing (Simon & Schuster), radio, local television (CBS Television Stations), film, and interactive and socially responsible media.
Weathering the Storm
Investors remain nervous about secular headwinds affecting the media industry. Audience fragmentation and technology are disrupting the traditional media business model. The value of quality television content continues to increase despite the increase in cord-cutting, skinny bundle pressures and industry-wide audience ratings declines. Specifically, CBS continues to report respectable advertising results as advertisers still find broadcast network television as the most effective way to find new customers. Furthermore, CBS’s digital streaming subscription services, including CBS All Access and Showtime OTT, are adding subscribers at a better than initially expected pace. Management remains on pace to achieving its goal of four million digital subscribers each at CBS All Access and Showtime OTT by 2020.
The value of television content continues to grow with the proliferation of various new video distribution platforms. We have seen CBS announce streaming agreements with the major participants including Netflix and Amazon and partner with new over-the-top (OTT) live-streaming participants Hulu, YouTube and Sony Vue. We expect premium video content owners, such as CBS, to benefit richly from selling its content through these and subsequent new distribution partners as they surface. Additionally, the retransmission consent fees CBS gets from its cable, satellite and telco operators and the reverse compensation revenues it receives from its network affiliates continues to rise. The Company exceeded $1 billion in retransmission and reverse compensation revenues in 2016 and expects to surpass $2.5 billion by 2020. Recurring affiliate and subscription fee revenues now account for approximately 25% of CBS’s revenues compared to just 8% a decade ago. During this period, CBS has reduced its reliance on what is deemed to be more cyclical advertising revenues from 70% to less than one-half of its overall revenues.
The economics of CBS’s business model generates strong and consistent free cash flow and a high return on its invested capital. As such, we remain encouraged by Leslie Moonves and the Board’s passionate commitment of exploring strategic alternatives for its non-core assets and aggressively returning capital to shareholders through share repurchases and dividends. The exit of non-core businesses includes the 2014 split-off of its outdoor advertising business and its agreement to combine its radio business with Entercom Communications in a tax-free merger that should close later this year. Concerning the return of capital, CBS repurchased approximately $14.3 billion, 297 million of its shares, through open-market purchases and has paid out over $1.7 billion in dividends since 2011. Astonishingly, its share count has declined nearly 40% during this period.
We believe CBS is well-positioned due to its ability to sell its high quality content no matter what the distribution medium. Currently at $63.78, the stock is trading at a 12% discount to PMV and a FTM Cash EPS multiple of 14.1x.
Investing in equity stocks is risky and subject to the volatility of the markets. Investing in small- and mid-cap stocks is more risky and volatile than investing in large-cap stocks. The intrinsic value of the stocks in which the Fund invests may never be recognized by the broader market. Ariel Fund and Ariel Appreciation Fund often invest a significant portion of their assets in companies within the financial services and consumer discretionary sectors and their performance may suffer if these sectors underperform the overall stock market.
On this page, we candidly discuss selected companies to illustrate our investment process. The information and our opinions were current as of June 30, 2017, but are subject to change. The information shown does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security. Past performance does not guarantee future results. The performance of any single portfolio holding is no indication of the performance of other portfolio holdings of Ariel Fund or Ariel Appreciation Fund. Click the following links for performance data for Ariel Fund and Ariel Appreciation Fund. Portfolio holdings are subject to change. During the period shown, Ariel Appreciation Fund held CBS Corporation and Thermo Fisher Scientific, Inc. During part of the period shown, Ariel Fund also held CBS Corporation. Not all shareholders will have experienced the returns as shown. Click here for a full listing of Ariel Fund's portfolio holdings. Click here for a full listing of Ariel Appreciation Fund's portfolio holdings.
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