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Thermo Fisher Scientific: Growth Momentum Endures
Stock Analysis & Ideas

Thermo Fisher Scientific: Growth Momentum Endures

Thermo Fisher Scientific (TMO) is one of the world’s leaders in the diagnostics and research industry. The company takes pride in its tremendous role in serving science, with its mission revolving around enabling its customers to make the world healthier, cleaner, and safer.

Thermo Fisher’s diversified customer mix comprises pharmaceutical and biotech companies, universities, research institutions, hospitals, clinical diagnostic labs, as well as government agencies. I am bullish on the stock.

Stronger Coming Out of the Pandemic

The company has been one of the great beneficiaries of the COVID-19 pandemic, with worldwide diagnostics budgets soaring during the past couple of years. Management took advantage of the sudden rise in financials in the midst of the pandemic to execute thoughtful M&A that would ensure Thermo Fisher’s dominance in the space.

For instance, last December, Thermo Fisher acquired PPD, Inc. for $17.4 billion in cash. PPD is one of the most prominent providers of clinical research services to the pharma and biotech industries across the globe.

With PDD’s clinical research services integrated with the rest of Thermo Fisher’s portfolio of diagnostics offerings, the company should be able to accelerate innovation, and enhance the productivity of its customers during their drug development processes.

Thermo Fisher also completed four more acquisitions last year. Combined with a vigorous diagnostics market following the pandemic, the company has retained strong growth momentum, even with COVID-19 gradually fading. This was evident in the company’s latest results.

Q1 Results: Continued Strength

Thermo Fisher’s Q1 results kick-started the company’s Fiscal 2022 on a high note, with revenues rising 19.3% to $11.82 billion. Revenue growth can be broken down into organic revenue growth of 3%, revenue growth from acquisitions of 18%, and a 2% headwind related to foreign exchange.

Therefore, despite the company’s acquisition-driven growth, it’s quite impressive that the core business itself continued to produce growing results on top of last year’s inflated numbers.

Thermo Fisher’s operating income margin remained quite rich, coming in at 29.2%, even though it declined from last year’s 35.4% as a result of increased operating expenses. Hence, adjusted EPS only climbed by 0.5% to $7.25, in spite of the much stronger top-line growth.

The company continued to allocate capital to expand its global scale in high-growth and emerging markets. During Q1, Thermo Fisher launched a new bio-repository in Vacaville, California, to expand its cell and gene therapy services. Last year’s acquisition of PPD, Inc. is also performing nicely, and merging smoothly with the rest of the business, according to management.

For Fiscal 2022, management boosted its outlook, now expecting revenues and adjusted EPS to land close to $42.5 billion and $22.65, respectively, up from $42 billion and $22.43 previously.

This implies adjusted EPS growth of 15.4%, which showcases both strong momentum retention in a post-COVID-19 world, and incremental additions to profitability driven by acquisitions.

To highlight how impressive this growth is, note that in Fiscal 2021 adjusted EPS grew 21.9% year-over-year. It would be compelling to see Thermo Fisher’s profitability stagnate this year, or even slightly decline, let alone grow in the double-digits on top of last year’s bloated numbers.

Capital Returns & Valuation

Last February, Thermo Fisher increased its dividend by 15% to a quarterly rate of $0.30. This marked the fifth consecutive annual dividend increase for the company.

Despite the double-digit dividend hike, the stock yield stands below 0.25%. Further, according to management’s guidance and the current DPS run rate, the payout ratio stands at just 5.3%. This is due to the company reinvesting most of its retained earnings back into the business, as it did last year through its various acquisitions.

The majority of Thermo Fisher’s capital returns are in the form of buybacks. The company repurchased $2 billion worth of stock during the latest quarter. This could suggest a rather sizable “buyback yield” assuming repurchases retain this pace, though I find it unlikely as Thermo Fisher has historically prioritized its capital allocation towards expanding its operations.

Based on management’s guidance, Thermo Fisher is trading at a forward P/E of 23.2. In my view, this is a rather fair multiple considering the company’s moat in the industry, continuous growth, and strong tailwinds in the diagnostics space.

That said, the stock’s valuation has historically been modestly lower, hovering between 16 and 22 times earnings.

Wall Street’s Take

Turning to Wall Street, Thermo Fisher Scientific has a Moderate Buy consensus rating based on seven Buys, one Hold, and one Sell assigned in the past three months. At $649.38, the average Thermo Fisher Scientific price target implies 23.4% upside potential.

Takeaway

Thermo Fisher Scientific’s qualities and moat in the industry are quite remarkable. Revenues and net income continue to grow, notwithstanding the inflated results from the 2020-21’s pandemic-driven boost, which illustrates management’s robust execution.

Following a rock-solid outlook for the rest of the year, enduring growth prospects, and a relatively reasonable valuation, I remain bullish on the stock.

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