Thermo Fisher Scientific Inc. (NYSE: TMO) made approximately $7.7 billion in net income last year. Have you ever heard of them? Most people haven’t, but the Massachusetts-based company is among the largest suppliers to the global healthcare industry. Along with its competitor Danaher (DHR), TMO stock has delivered strong market-beating returns over time with little drama or fanfare. Approximately 89% of TMO shares are owned by institutions, so there is not much speculative trading activity going on. You should consider getting some.
All eyes will be on Apple ( AAPL ) and Amazon ( AMZN ) this week, but Thermo Fisher reports earnings on Thursday as well, and their report is likely to be quietly good.
So how are they doing it?
First, Thermo Fisher benefits from the demographic headwinds of an aging population and increased medical research. Demographics are not something investors should ignore – the aging of the world’s population is a megatrend that spans countries and continents. Much of TMO’s business is in the “picks and shovels” category, meaning they are less vulnerable to political changes than say health insurers like UnitedHealth Group ( UNH ) or drugmakers like Pfizer ( PFE ) . Thermo Fisher gets roughly half of its revenue overseas, so the company is directly connected to global trends and an increased willingness to do research and development.
Second, the company is relatively M&A oriented, buying smaller competitors on a regular basis. But they don’t limit themselves to small deals – they bought PPD (a clinical research company) for $17.4 billion last December. Gathering smaller competitors and combining back-office functions is a classic business strategy that has worked across industries and countries.
Third, TMO has proven to the world that it is one of the only companies that has the manufacturing capability to rapidly produce diagnostic tests. COVID brought a boom to TMO’s revenue – the company revealed that they earned roughly $1.7 billion in the last winter quarter from COVID tests at their most recent earnings conference call. Much of the mandatory testing for COVID was redundant and wasteful, but demand for COVID tests looks set to remain seasonally high for years as patients need confirmed tests to know if they should receive antivirals. . As I write this, the US is still seeing more than 100,000 daily cases of COVID and roughly 400 daily deaths, basically in line with this time in 2021. We’ll all be hoping for a better winter, but for investments yours, I’d avoid airline and cruise stocks and buy companies like TMO.
At these points, the combination of demographic-driven organic growth, M&A and the pandemic revenue boom make TMO an attractive stock to own.
TMO earnings and rating
TMO isn’t the cheapest stock in the world, but it’s not expensive either, trading for around 25×2022 earnings estimates of $22.73. For 2023, analysts expect earnings to grow to $24.40, and for 2024, analysts expect earnings to grow to $27.53. I believe these revenue estimates are too low because the market is pricing in a big drop in sales of COVID tests, which I somewhat doubt will happen for another year. And the organic growth trend is approximately 8%-9% per year, per management.
TMO was able to grow revenue by 20% every year for the past 10 years (yes, the pandemic helped them). Combining their M&A track record with the 8-9% organic growth expected for the near future, I think TMO is fully capable of continuing to grow revenue at ~20% per year through the end of the decade. Winners keep winning! If the multiple is stable, this implies that TMO will reach $1 trillion in market cap sometime around 2030. If the multiple falls, it could take another year or two. But the growth has to be there. Analysts have consistently underestimated the company’s ability to grow revenue and profit. This is due to a huge demographic headwind, so all management has to do is execute competently, which they have so far.
For a quick litmus test, here’s the approximate trend in the PE ratio for TMO stock (note that it won’t correspond to the earnings numbers above since the revenue data is slightly different). TMO roughly doubled from 2012 to 2014, but the PE ratio has been more or less stable since then.
I always like to do this test to see if a rising stock is driven primarily by earnings growth or a growing earnings multiple that investors are willing to pay. As an investor, you always prefer your stocks to go up because the underlying business is successful and not because of hype. As a trader, you would probably prefer the hype so you can jump your stocks to the top! TMO passes this test well because the multiple is about the same as it was seven years ago. And paying 25 times earnings for a growing company doesn’t require you to do mental gymnastics to justify the purchase price – if growth comes in lower than expected, you end up making less money than losing your shirt. This is known as “growth at a reasonable price”. TMO also pays a small dividend.
TMO faces similar risks to many technology-focused companies, the main one being that they cannot sustain the levels of growth that investors have come to expect. But the issues that have so much stake in the market — like operating losses, debt loads, dilution and high multiples — simply aren’t a problem at Thermo Fisher Scientific. The company is girl-next-door, not flashy or popular, but a winning choice for the long term. All signs point to TMO stock approaching and eventually surpassing $1 trillion in market cap. The overall market environment is unfavorable for stocks right now, but I would feel good about buying a TMO now and potentially getting more in a market decline.