Thermo Fisher Stock Has Soared. It’s Still Cheap—and Has Plenty of Upside.
Pop quiz: Name a company that doubled its earnings during the pandemic but now trades more cheaply than it did at the start of 2020, even as sales hit new records.
If you didn’t say Thermo Fisher Scientific (ticker: TMO), it may be because you forgot about this Covid beneficiary. Or because you never knew its name at all, even though its products help researchers create new drugs and tests that save lives. In either case, it’s worth getting to know now.
The Waltham, Mass., firm is the global leader in laboratory equipment, analytical instruments and technologies, and specialty diagnostics tools that are used across the healthcare, pharmaceutical and biotech industries. That positioned Thermo Fisher to reap huge benefits from Covid-19 testing, allowing earnings per share to jump from $12.35 in 2019 to more than $25 in 2021.
As the pandemic fades, earnings have dipped, taking the stock with them. But the slump shouldn’t last long.
“A lot of investors are too focused on what Thermo Fisher did during Covid and that it’s now slowing down, but that’s a minute part of the business,” says Craig Sarembock, principal at Bartlett Wealth Management, which owns the stock. “It’s unimportant to me, given that the company already provided really good guidance.”
In early February, Thermo Fisher offered full-year guidance when it reported better-than-expected fourth-quarter results, saying it expects to earn $23.70 a share in 2023 on revenue of $45.3 billion. That was ahead of the average analyst estimates for earnings of $23.07 a share and revenue of $43.8 billion. Still, the projected per-share profit is below 2021’s record $25.13.
The analysts’ consensus calls for Thermo Fisher to surpass that all-time high again in 2024, with earnings per share of $26.70. But the two-year decline has spooked investors, with the shares falling 14% since the end of 2021 as the company has faced difficult comparisons to the pandemic boom.
The upshot: The stock now trades at 24 times forward earnings, about its five-year average and below its pandemic high of 26.6 in December of 2021. Yet consensus estimates call for earnings to keep jumping–reaching more than $30 a share in 2025–while metrics like free cash flow and return on equity remain well above prepandemic levels. The average analyst price target is above $650, nearly 15% higher than Monday’s close of around $574.
“This is a stock to own for the long-term, and in terms of valuation, it certainly looks attractive for new purchasers now,” says Sarembock.
The shares also look appealing in the light of recent market turmoil: Although Thermo Fisher is often classified as a growth stock, it enjoys steady recurring revenue among loyal customers that often are doing intricate research and development.
“It’s exposed to the attractive dynamics in healthcare, where the process for creating drugs is more complex, tool intensive and tool sensitive,” says Sarah Kanwal, director and equity analyst at Crestwood Advisors, citing newer products like biologics and larger molecule drugs that are produced differently. “Thermo Fisher is the picks and shovels behind that trend. It’s agnostic to specific drugs or who the winners and losers are.” Crestwood owns the stock.
Or as Sarembock puts it: “No matter what [healthcare] companies are doing, they need Thermo Fisher for their labs.”
The confidence that comes with supplying a number of growing healthcare end markets—thanks to an aging population and increasing treatment options—was on display in the company’s most recent results. Chief Executive Marc Casper used phrases like “crushed it” and “phenomenal performance.” The company also boosted its dividend by nearly 17%, and its guidance implies 7% core organic revenue growth, excluding acquisitions.
Of course, it’s hard to talk about Thermo Fisher without talking about its acquisition strategy, which has helped it expand and diversify its revenue in terms of customers, geographies, and new products and business segments.
“Ten years ago, this was a different business, and much more instrument focused. If we had a recession then, it could have been a much bigger [problem],” says Douglas Kelly, partner and portfolio manager at Williams Jones Wealth Management, which owns the stock. “Today it’s not that cyclical of a business unless we get into a really nasty downturn.”
Thermo Fisher pulled off all the dealmaking without running up its debt ratios. In fact, net debt to earnings before interest, taxes, depreciation and amortization, or Ebitda, stood at 2.2 times at the end of last year, its second lowest level since 2013. Total debt to Ebitda, at 2.9 times, is well below the prepandemic period dating back to 2013.
Moreover, free cash flow is expected to reach $7.2 billion this year, nearly double where it stood in 2018. That gives the company flexibility to potentially pursue other acquisitions, and to increasingly return more cash to shareholders in the form of dividends and share buybacks, as it has been doing in recent years.
“This is the kind of business in our sweet spot,” says Kelly. “Good returns and a management team that does the right things with that cash. That’s the formula.”
Sounds simple enough, just like being diligent about diet and exercise. Though of course both are easier said than done. Until more of us learn to take that advice, and overcome numerous other healthcare hurdles, Thermo Fisher will have plenty of room to grow.