Thermo Fisher Scientific (NYSE: TMO) has been experiencing a great top and bottom-line growth phase, as demand for the company’s scientific services remains robust even in a post-COVID-19 environment.
Thermo Fisher has a multifaceted customer mix, which includes parties like pharmaceutical and biotech companies, universities, clinical diagnostic labs, and government agencies, among others. That, combined with the continuous expansion of its operating capabilities, should keep driving solid growth in the coming years.
While shares have modestly recovered from their June lows, Thermo Fisher appears to remain reasonably valued. Accordingly, I am bullish on the stock.
Thermo Fisher: Not Just a Pandemic Stock
Thermo Fisher received increased investor attention in 2020 and 2021 due to the company being one of the prominent beneficiaries of the COVID-19 pandemic. As diagnostic budgets soared all over the world at the time, Thermo Fisher found itself in a sweet spot. To add some color, the company’s net income grew 72.5% and 21.2% in Fiscal 2020 and 2021, respectively.
However, Thermo Fisher is not just a “pandemic stock.” The company features a prolonged track record of sustainable growth, with the bulk of its diagnostics services not dependent on COVID-19. It’s a major player in the diagnostics industry as a whole.
In fact, Thermo Fisher’s management took benefit of the additional boost in financials during the past couple of years to execute M&A that further expanded Thermo Fisher’s reign in the space. For example, last December, Thermo Fisher purchased PPD, Inc. for $17.4 billion in cash. PPD is among the most dominant providers of clinical research services to the pharma and biotech industries globally.
It was a mega acquisition, and as PDD’s clinical research services blend with Thermo Fisher’s wide portfolio of diagnostics offerings, innovation should accelerate, and synergies should be unlocked. This appears to already be the case, in fact, as both PDD and several other acquisitions completed by the company last year have started to be accretive in Thermo Fisher’s bottom line.
Q2 Results Showed Sustained Momentum
Thermo Fisher’s Q2 results continued to display robust momentum powered by the company’s acquisitions, as well as organic growth. For starters, revenues rose 18.3% to nearly $11 billion. Revenue growth can be broken down into organic revenue growth of 3%, revenue growth from acquisitions of 19%, and a 4% headwind related to foreign exchange.
Overall, despite the majority of the company’s growth being acquisition-driven, it’s rather remarkable that the core business itself continues to produce rising results against last year’s inflated numbers and current FX-related headwinds.
Thermo Fisher’s operating income margin remained quite hefty, coming in at 26.6%, even though it softened from last year’s 32.3%. It makes sense, after all, as last year was subject to tremendous one-off tailwinds and cost synergies.
The company kept allocating capital to expand its global scale in high-growth and emerging markets. During the first half of 2022, Thermo Fisher opened a new bio-repository in Vacaville, California, to develop its cell and gene therapy services. The previously-mentioned acquisition of PPD, Inc. is also performing satisfactorily and integrating smoothly with the rest of Thermo Fisher’s businesses, according to management.
To reflect the company’s ever-lasting growth momentum, management raised its outlook, now anticipating revenues and adjusted EPS to end up close to $43.15 billion (previously $42.45 billion) and $22.93 (previously $22.65), respectively. Particularly, the adjusted EPS figure suggests another year of record profitability and year-over-year growth of 16.9%.
I stress the fact that this is very impressive, keeping in mind Thermo Fisher’s results were expected to naturally give back the ground gained during the pandemic. Not was it sustained, but the company is growing further and quite rapidly.
Growing Capital Returns
Back in February, Thermo Fisher raised its dividend by 15% to a quarterly rate of $0.30 – the fifth consecutive annual dividend raise for the company.
While the double-digit dividend hike was certainly welcome, it’s worth noting that TMO stock’s yield stands close to a miniature 0.2%. By combining management’s outlook and the current DPS run rate, the payout ratio stands at just 5.2%. This is due to Thermo Fisher’s capital allocation strategy, which prioritizes reinvesting the majority of its retained earnings back into the business, as evident by the various acquisitions.
Still, the low payout ratio implies that there is lots of room for the company to continue growing the dividend at possibly much faster rates if management no longer identifies any worthwhile acquisition targets.
In any case, due to the tiny dividend, Thermo Fisher’s capital returns also include some noteworthy share repurchases. The company repurchased $2 billion worth of stock year-to-date. Repurchases usually accelerate when the stock appears to be undervalued.
How Much Should You Pay for TMO Stock?
Speaking of the stock’s valuation, by employing management’s guidance, Thermo Fisher is trading at a forward P/E of 24.3x. I feel this is a relatively fair multiple taking into account the company’s moat in the industry, sustained growth momentum, and consistently growing spending in the diagnostics space.
However, amid the ongoing market turmoil, you should only pay this much only if you are planning to hold TMO over the long term. This is because short-term valuation compression headwinds can still occur during the current rising-rates environment. Over the long-term, however, I believe that the stock can smoothly grow into its valuation amid strong earnings-per-share growth expectations.
Is TMO Stock a Buy, According to Analysts?
Regarding Wall Street’s sentiment, Thermo Fisher Scientific has a Strong Buy consensus rating based on eight Buys and two Hold ratings appointed in the past three months. At $674.33, the average Thermo Fisher Scientific stock forecast suggests 19.7% upside potential.
Conclusion: TMO Stock is Fairly Valued
While Thermo Fisher Scientific’s results soared during the pandemic, the company is well positioned to retain its growth momentum in a post-pandemic world.
With management providing further improved guidance for the rest of the year and shares trading at a rather fair valuation for investors inclined to hold TMO over the long run, I remain bullish on the stock.
