Wednesday, February 08, 2006

Fisher Scientific - Great Biz...WHAT ABOUT THE SHAREHOLDERS?

Fisher Scientific (FSH) has been a model of a well-run business. Its free cash flow has equaled or exceeded net income for the last five years.

The just announced quarter exceeded Street expectations on the basis of slight improvement in gross margins to 34.7% , up about 50 basis points, and lower S,G,&A, which improved by over 1%.

As mentioned before, the stat that really impresses me has been the FCF generation of this business.

Here is the net income, free cash flow generation, and FCF margin for the last five years:

2005 $455.7 $484.2 8.7%

2004 $166.4 $299.4 6.4%

2003 $78.4 $137.8 3.9%

2002 $50.6 $115.4 3.6%

2001 $16.4 $118.5 4.1%

No evidence of share buybacks at all, but what a gorilla at income and free cash flow growth. No dividend either!

The fully diluted share base has grown from 53 million shares outstanding at the end of 2001 to a current 128.5 million shares.

Returns on capital have been unimpressive at 5-6% for the last few quarters, representing some improvement versus the 3-4% we experienced in 2004 and 2003, but well below the 8- 9% that we saw in 2001 and 2002.

Huge free cash flow generation, returns on capital which seem well below optimum, and NO return of capital to shareholders. Debt to assets , which in 2001 represented almost 100% has been paid down to only about 25% of total assets.

The company completed 4 acquisitions in 2005, 3 in 2004, one in 2003, two in 2002, and 4 in 2001.

In the company’s conference call, management continues to talk of organic growth of 6-8% and ongoing price improvement. As well, the company considers internal and external opportunities for growth investment, but less chance of a major stock repurchase.

Given the less than stellar returns on capital, the huge free cash flow generation, the resultant improved balance sheet, isn’t it time for the board to consider returning capital to the shareholders?

Capital has been allocated to the benefit of the bondholder, to the seller of the businesses acquired, and to some fairly hefty options compensation.
What about us, the owners of the business???


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