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Stock Analysis & Ideas

Thermo Fisher Scientific: Strong Growth, Relatively Overvalued

Thermo Fisher Scientific, Inc. (TMO) provides analytical instruments, equipment, reagents and consumables, software, and services for research, analysis, discovery, and diagnostics. It operates through the Life Sciences Solutions, Analytical Instruments, Specialty Diagnostics, and Laboratory Products and Services segments.

I am neutral on TMO stock. Its profitability is consistent and strong, but there is a high level of debt, as the company significantly increased its long-term debt in 2021, and the latest fourth-quarter 2021 results were mixed.

Investors looking for dividend stocks most probably will not get excited by the minimal dividend yield of Thermo Fisher Scientific. However, the firm’s strong financial performance may still make the stock appealing to investors.

Thermo Fisher Scientific Q4 2021 and Full-Year 2021 Results

The medical device maker in Q4 2021 reported GAAP EPS of $4.17, a miss of -$0.59, and revenue of $10.7 billion, a beat of $1.45 billion. TMO stock earnings have an impressive track record of beating estimates in the past eight consecutive quarters.

In Q4 2021, the firm reported a marginal 1% increase in revenue year-over-year, and GAAP diluted EPS was $4.17, versus $6.24 in the same quarter last year, representing a year-over-year decline of 33.2%.

GAAP operating income for the fourth quarter of 2021 was $2.54 billion, lower than $3.07 billion last year, or a decline of 17.26%. Also, the GAAP operating margin narrowed to 23.7%, compared with 29.1% in the fourth quarter of 2020.

Have full-year 2021 results showed a more optimistic view on long-term growth? The answer is affirmative. There was revenue growth of 22% to $39.2 billion in 2021 versus $32.2 billion in 2020.

GAAP diluted EPS for the full year increased 22% to $19.46, versus $15.96 in 2020, GAAP operating income for 2021 grew to $10 billion, versus $7.8 billion a year ago, or an increase of 28.8%. The GAAP operating margin expanded to 25.6% in 2021, compared with a value of 24.2% in 2020.

Turning to segment data, Life Sciences Solutions year-over-year increased its contribution to total revenue to 39.9% from 37.8% in 2020, whereas Specialty Diagnostics decreased its contribution to 14.4% from 16.6% in 2020. Analytical Instruments and Laboratory Products & Biopharma Services also both declined their contribution to total revenue, but not by much.

On a positive note, Thermo Fisher Scientific expects its COVID-19 testing business to increase in revenue in 2022 to $1.75 billion, representing a large increase of $1 billion compared to previous expectations.

COVID-19 response revenue is important for the firm, but as the pandemic should probably transform to endemic, the firm has stated it could shift its focus to other critical areas.

Fundamentals – Risks

The firm has a high level of debt as the net debt to equity ratio of 74.2% is considered high. Nevertheless, debt coverage is fine now, and the interest coverage ratio of 19.1x does not raise concerns.

The Piotroski F-Score is 5, which is about average, the operating margin is expanding, and there is sustainable revenue and earnings growth. The forward dividend & yield of $1.04 and 0.2%, respectively, do not impress.

Valuation

TMO stock is relatively attractive based on its P/E ratio of 27.3x compared to the U.S. life sciences industry average of ~38x. On the other hand, the stock’s P/E ratio is relatively overvalued compared to the U.S. market’s P/E of ~16x and based on its PEG ratio of 6.6x.

Wall Street Take

Turning to Wall Street, Thermo Fisher has a Strong Buy consensus based on six Buys and one Hold rating. The average Thermo Fisher price target of $690.43 represents 30% upside potential.

Conclusion

Despite a strong 2021 with solid profitability and positive free cash flow generation, these factors are overshadowed by the high level of debt and a relatively expensive valuation.

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