Thematic evaluation
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Thermo Fisher Scientific, Inc. (TMO)

October 03, 2024

Compared to: Agilent Technologies, Inc. (A) | IDEXX Laboratories, Inc. (IDXX) | Health Care Select Sector SPDR Fund (XLV)

Our reasoning

Thermo Fisher Scientific's current valuation appears fair, balancing its strong financial performance and market position against potential risks. The company's valuation multiples are slightly above historical averages but in line with peers, reflecting its growth prospects in high-potential markets like proteomics. While there are significant growth opportunities, risks related to customer spending dependence and acquisition integration are not fully priced in, supporting a fair valuation assessment.

Key takeaways
  • Thermo Fisher Scientific Inc. (TMO) is a financially strong company with a solid track record of profitability and cash flow generation, but its revenue growth is slowing.
  • TMO is investing in strategic initiatives, such as the acquisition of Olink, which is expected to expand its capabilities in the high-growth proteomics market.
  • The company has a strong liquidity position and a manageable debt burden, but its risk-adjusted performance is lower than some peers.
  • TMO's capital allocation strategy is balanced, with a focus on organic growth, strategic M&A, and shareholder returns.
  • The company's future outlook is positive, with strong cash flow generation and a commitment to shareholder returns, but it faces risks related to customer spending, government funding, and integration of acquisitions.
Fairly valued
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Evaluation summary

  1. Company Overview:

    • Thermo Fisher Scientific Inc. (TMO) is a global leader in providing analytical instruments, equipment, reagents, consumables, software, and services for research, analysis, discovery, and diagnostics. The company operates in four main business segments: Life Sciences Solutions, Analytical Instruments, Specialty Diagnostics, and Laboratory Products and Biopharma Services.
    • TMO's products and services are used by a wide range of customers, including pharmaceutical, biotech, academic, government, industrial, and healthcare organizations. The company's revenue is derived from a diverse mix of products and services, with a significant portion coming from its Life Sciences Solutions segment.
    • TMO's target market is the global scientific community, which is characterized by strong growth driven by factors such as increasing research and development spending, advancements in technology, and the growing demand for healthcare solutions.
    • For comparative analysis, we will be using the Health Care Select Sector SPDR Fund (XLV) as a benchmark and IDEXX Laboratories, Inc. (IDXX) and Agilent Technologies, Inc. (A) as industry peers.

  2. Financial Performance:

    • TMO has a strong track record of financial performance, with consistent revenue growth and profitability. Revenue has grown at a CAGR of 7.5% over the past five years, driven by strong demand for its products and services.
    • The company's gross margin has been consistently above 40%, reflecting its ability to effectively manage costs and maintain profitability. Operating margin has also been consistently above 20%, indicating strong operational efficiency.
    • TMO's profitability metrics are strong, with ROA, ROE, and ROIC consistently above 10%. This indicates that the company is effectively utilizing its assets and generating returns for its shareholders.
    • Compared to its peers, TMO has shown mixed performance. While it has outperformed both IDXX and A in some periods, it has also underperformed in others. Notably, TMO has consistently outperformed IDXX over the 3-year period, suggesting a potential advantage in long-term growth.

  3. Operational Efficiency:

    • TMO has a strong balance sheet, with a significant amount of cash and short-term investments. The company has been effectively managing its working capital, as evidenced by the decreasing inventories and fixed assets.
    • TMO's operating cash flow has been consistently strong, exceeding net income, indicating a strong ability to generate cash from its operations. The company's free cash flow has also been consistently positive, supporting its ability to invest in growth opportunities and return capital to shareholders.
    • TMO's capital expenditures have been decreasing, suggesting a focus on optimizing existing assets rather than making significant new investments. The company's acquisition strategy is more conservative, with a focus on smaller, strategic acquisitions.
    • TMO's dividend growth is sustainable, given its strong cash flow generation. The company's share repurchase programs are likely contributing to shareholder returns.
    • TMO's short-term liquidity is strong, with a current ratio consistently above 1.5. The company's long-term solvency is also strong, with a manageable debt burden and a healthy debt-to-equity ratio.
    • Compared to its peers, TMO's operational efficiency is moderate. While it has shown strong cash flow generation and a healthy balance sheet, its risk-adjusted performance has been lower than IDXX and A.

  4. Growth Opportunities:

    • TMO has a number of growth opportunities, including market expansion, M&A, R&D, and geographic expansion. The company is expanding its presence in high-growth markets, such as proteomics and clinical trials support.
    • TMO has a history of successful acquisitions, and it is actively pursuing strategic acquisitions to expand its product portfolio and market reach. The company's R&D pipeline is robust, with a focus on developing innovative products and technologies.
    • TMO is expanding its geographic reach, particularly in emerging markets. The company is also investing in new technologies, such as artificial intelligence and machine learning, to enhance its products and services.
    • TMO's strategic focus areas include innovation, customer partnerships, and operational excellence. The company is committed to investing in R&D, expanding its product portfolio, and improving its operational efficiency.
    • TMO's management has a strong track record of executing strategic plans. The company has consistently delivered on its financial targets and has a history of successful acquisitions.

  5. Risks and Threats:

    • TMO faces a number of risks, including dependence on customer capital spending and government funding policies, exposure to economic and political risks, integration and performance risks associated with acquisitions, cybersecurity threats, and regulatory compliance issues.
    • The company's dependence on customer capital spending and government funding policies could impact its financial performance. TMO's exposure to economic, political, and currency risks from international operations could also impact its financial performance.
    • The company's ability to develop new products and adapt to technological change could impact its financial performance. Integration and performance risks associated with acquisitions could also impact the company's financial performance.
    • Cybersecurity threats and data privacy/security regulations could impact the company's financial performance. Product quality and regulatory compliance issues could also impact the company's financial performance.
    • TMO's competitive landscape is highly fragmented, with a number of large and specialized competitors. The company faces competition from both established players and new entrants.

  6. Valuation Analysis:

    • TMO's valuation is currently above its historical average, but it is in line with its peers. The company's P/E ratio is slightly above its historical average, but it is below the average P/E ratio for the S&P 500.
    • TMO's EV/EBITDA ratio is also slightly above its historical average, but it is in line with its peers. The company's valuation is supported by its strong financial performance, growth opportunities, and strong track record of execution.
    • Potential catalysts for TMO's valuation include continued revenue growth, margin expansion, and successful acquisitions.

  7. Price Performance:

    • TMO's stock price has outperformed the XLV benchmark in the short term (YTD, 1 Week, 1 Month, 3 Months, and 1 Year), but it has underperformed in the longer term (2 Years and 3 Years).
    • TMO's volatility has been significantly higher than XLV's, indicating that its price is likely to fluctuate more than XLV's. TMO has also experienced significantly larger maximum drawdowns than XLV, indicating that it is more susceptible to market downturns.
    • Compared to its peers, TMO's price performance has been mixed. While it has outperformed both IDXX and A in some periods, it has also underperformed in others. Notably, TMO has consistently outperformed IDXX over the 3-year period, suggesting a potential advantage in long-term growth.

  8. Future Outlook:

    • TMO's management has raised its full-year 2024 revenue guidance to $42.4 billion to $43.3 billion, and adjusted EPS guidance was increased to $21.29 to $22.07 per share.
    • The company expects the overall market to decline low-single-digits in 2024, but its execution will enable it to continue gaining market share.
    • Analyst estimates for TMO's future performance are generally positive, with a consensus expectation for continued revenue growth and profitability.

  9. Summary:

    • TMO is a financially strong company with a solid track record of profitability and cash flow generation. The company's revenue growth is slowing, but it is effectively managing costs and maintaining profitability.
    • TMO is investing in strategic initiatives, such as the acquisition of Olink, which is expected to expand its capabilities in the high-growth proteomics market. The company has a strong liquidity position and a manageable debt burden.
    • TMO's capital allocation strategy is balanced, with a focus on organic growth, strategic M&A, and shareholder returns. The company's future outlook is positive, with strong cash flow generation and a commitment to shareholder returns.
    • TMO's financial performance is strong relative to its industry peers. The company faces some risks, such as dependence on customer capital spending and government funding policies, exposure to economic and political risks, and integration and performance risks associated with acquisitions.
    • Overall, TMO is a financially healthy company with a strong future outlook.
Peer fundamentals 
Fundamentals
Insights
  • Thermo Fisher Scientific Inc. (TMO) is a financially strong company with a solid track record of profitability and cash flow generation.
  • The company's revenue growth is slowing, but it is effectively managing costs and maintaining profitability.
  • The company is investing in strategic initiatives, such as the acquisition of Olink, which is expected to expand its capabilities in the high-growth proteomics market.
  • The company has a strong liquidity position and a manageable debt burden.
  • The company's capital allocation strategy is balanced, with a focus on organic growth, strategic M&A, and shareholder returns.
  • The company's future outlook is positive, with strong cash flow generation and a commitment to shareholder returns.
  • The company's financial performance is strong relative to its industry peers.
  • The company faces some risks, such as dependence on customer capital spending and government funding policies, exposure to economic and political risks, and integration and performance risks associated with acquisitions.
  • Overall, Thermo Fisher Scientific Inc. (TMO) is a financially healthy company with a strong future outlook.
Analysis
  • Revenue - Revenue growth is slowing, potentially due to the moderation in COVID-19 related demand. - The company is investing in strategic initiatives, such as the acquisition of Olink, which is expected to expand its capabilities in the high-growth proteomics market. - The company expects the overall market to decline low-single-digits in 2024, but its execution will enable it to continue gaining market share.
    • Profitability
      • The company is highly profitable relative to its assets, equity, and capital.
      • The company is effectively managing costs and maintaining profitability.
      • The company's focus on operational efficiency is contributing to improved gross margins.
      • The company is investing in strategic initiatives, which may be impacting operating margins in the short term.
    • Liquidity
      • The company has a strong liquidity position, with ample cash and short-term investments.
      • The company has a strong ability to meet its short-term obligations.
    • Solvency
      • The company's long-term solvency is strong, with a healthy debt-to-equity ratio and a significant amount of equity.
      • The company has a manageable debt burden relative to its earnings.
    • Operational Efficiency
      • The company is effectively managing its assets, as evidenced by the decreasing inventories and fixed assets.
      • The company is effectively controlling operating expenses, as evidenced by the increasing gross margin.
    • Cash Flow Analysis
      • The company has a strong short-term liquidity position, with ample operating cash flow.
      • The company's long-term solvency is strong, with significant free cash flow generation and a manageable debt burden.
      • The company's capital expenditures are decreasing, suggesting a focus on optimizing existing assets rather than making significant new investments.
      • The company's acquisition strategy is more conservative, with a focus on smaller, strategic acquisitions.
      • The company's R&D spending is likely contributing to its product development and innovation, which is driving revenue growth.
      • The company's dividend growth is sustainable, given its strong cash flow generation.
      • The company's share repurchase programs are likely contributing to shareholder returns.
      • The company's capital allocation strategy is balanced, with a focus on organic growth, strategic M&A, and shareholder returns.
    • Risk Factors
      • The increasing short-term debt and long-term debt could indicate a shift in financing strategy or a need for additional capital.
      • The company's dependence on customer capital spending and government funding policies could impact its financial performance.
      • The company's exposure to economic, political, and currency risks from international operations could impact its financial performance.
      • The company's ability to develop new products and adapt to technological change could impact its financial performance.
      • Integration and performance risks associated with acquisitions could impact the company's financial performance.
      • Cybersecurity threats and data privacy/security regulations could impact the company's financial performance.
      • Product quality and regulatory compliance issues could impact the company's financial performance.
      • Litigation and contingent liabilities could impact the company's financial performance.
    • Future Outlook
      • The company's balance sheet is expected to continue to grow, with a focus on increasing cash and short-term investments.
      • The company's cash flows are expected to continue to grow, driven by its strong profitability and efficient working capital management.
      • The company's strong financial position will support its ability to invest in innovation, pursue strategic M&A, and return capital to shareholders.
      • The company's free cash flow will support its ability to repay debt, increase dividends, and invest in organic growth opportunities.
      • The company expects the overall market to decline low-single-digits in 2024, but its execution will enable it to continue gaining market share.
      • The company expects adjusted operating margin to be between 22.5% and 22.8% for the full year.
      • The company raised its full-year 2024 revenue guidance to $42.4 billion to $43.3 billion.
      • Adjusted EPS guidance was increased to $21.29 to $22.07 per share.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-10-01)
Health Care Select Sector SPDR Fund (XLV)
  • Performance Comparison:
    • TMO has shown mixed performance compared to XLV. While it has outperformed XLV in the short term (YTD, 1 Week, 1 Month, 3 Months, and 1 Year), it has underperformed in the longer term (2 Years and 3 Years). This suggests that TMO's performance may be more volatile and less consistent than XLV's.
  • Risk and Return Analysis:
    • TMO has provided higher returns than XLV in the short term, but it has underperformed in the longer term. This suggests that TMO may be more growth-oriented, but its growth may be less sustainable than XLV's.
    • TMO has been significantly more volatile than XLV, as evidenced by its higher annualized volatility. This indicates that TMO's price is likely to fluctuate more than XLV's, making it a riskier investment.
    • TMO has experienced significantly larger maximum drawdowns than XLV, indicating that it is more susceptible to market downturns. This further reinforces its higher risk profile.
  • Risk-Adjusted Performance:
    • XLV has consistently offered a better risk-adjusted return than TMO, as indicated by its higher Sharpe ratio. This suggests that XLV has been more efficient at generating returns relative to its risk.
    • TMO's higher beta suggests that it is more sensitive to market movements than XLV. This means that TMO's price is likely to fluctuate more than XLV's during market swings, making it a riskier investment.
  • Overall Assessment:
    • TMO has shown strong short-term performance but has underperformed XLV in the longer term. Its higher volatility and larger drawdowns indicate a higher risk profile. While TMO may offer higher growth potential, its risk-adjusted performance is inferior to XLV's. Investors seeking a more stable and less risky investment may prefer XLV. However, investors with a higher risk tolerance and a longer investment horizon may consider TMO for its potential growth opportunities.
    • The recent trends suggest that TMO's volatility and beta remain higher than XLV's, indicating that TMO continues to be more sensitive to market fluctuations. This suggests that TMO's risk profile may not be improving, and investors should carefully consider their risk tolerance before investing in TMO.
Peers Price History(as of 2024-10-01)
Agilent Technologies, Inc. (A)IDEXX Laboratories, Inc. (IDXX)
  • Performance Comparison:
    • TMO has shown a mixed performance history compared to its peers. While it has outperformed both IDXX and A in some periods, it has also underperformed in others. Notably, TMO has consistently outperformed IDXX over the 3-year period, suggesting a potential advantage in long-term growth.
    • The consistency of TMO's performance relative to its peers is moderate. It has shown periods of both outperformance and underperformance, indicating that its performance is not consistently superior to its peers.
  • Risk and Return Analysis:
    • TMO has generally provided lower annualized returns than IDXX, particularly over the 2-year period. However, TMO has outperformed both IDXX and A over the 3-year period, suggesting a potential for long-term growth.
    • TMO has generally been less volatile than IDXX but more volatile than A. This suggests that TMO may offer a balance between risk and return compared to its peers.
    • TMO's maximum drawdown of 35.07% is lower than IDXX's 54% but higher than A's 42.73%. This indicates that TMO's risk profile is moderate compared to its peers.
  • Risk-Adjusted Performance:
    • TMO has generally had a lower Sharpe Ratio than IDXX, indicating that IDXX has offered a better risk-adjusted return over the period. A has also generally had a higher Sharpe Ratio than TMO. This suggests that TMO may not be as efficient in generating returns relative to its risk compared to its peers.
    • TMO's beta value, generally above 1, indicates that it is more volatile than the overall market. However, its beta is lower than IDXX's, suggesting that TMO is less sensitive to market movements than IDXX.
  • Overall Assessment:
    • TMO's performance has been mixed compared to its peers, with periods of both outperformance and underperformance. While it has shown potential for long-term growth, its risk-adjusted performance has been lower than IDXX and A.
    • TMO's volatility is moderate compared to its peers, suggesting a balance between risk and return. However, its lower Sharpe Ratio indicates that it may not be as efficient in generating returns relative to its risk.
    • TMO's beta suggests that it is more volatile than the market but less volatile than IDXX. This indicates that TMO may be a less risky investment than IDXX but still carries more risk than A.
    • Overall, TMO appears to be a moderately risky investment with a mixed performance history. While it has shown potential for long-term growth, its risk-adjusted performance has been lower than its peers. Investors should carefully consider TMO's risk profile and performance history before making any investment decisions.
Peers Fundamentals(as of 2024-06-30)
Agilent Technologies, Inc. (A)IDEXX Laboratories, Inc. (IDXX)

  1. Market Position and Size:

    • TMO is a dominant player in the healthcare technology sector, with a market capitalization significantly larger than its peers, IDXX and A.
    • TMO's revenue, EBITDA, and net income are all significantly higher than its peers, reflecting its larger size and market dominance.
    • TMO's substantial market cap and financial performance solidify its position as a dominant player in the industry, dwarfing its peers in terms of size and scale.

  2. Profitability and Efficiency:

    • TMO's profitability metrics, while strong, are lower than its peers, but significantly higher than the industry average.
    • TMO's efficiency in generating returns is lower than its peers, but still strong compared to the industry average.
    • This suggests that TMO may face challenges in improving its profitability margins and efficiency compared to its smaller, more focused competitors. However, TMO's strong financial performance and ability to generate returns despite its size indicate its overall financial health and potential for future growth.

  3. Financial Health and Stability:

    • TMO's liquidity and solvency metrics are generally in line with its peers, but its debt levels are higher.
    • TMO's strong cash flow generation and profitability provide a buffer against potential financial distress.
    • This suggests that TMO may face challenges in managing its debt levels and maintaining its financial stability compared to its peers. However, TMO's strong cash flow generation and profitability provide a buffer against potential financial distress.

  4. Valuation and Market Perception:

    • TMO's valuation metrics are generally in line with its peers, but its price-to-earnings ratio is higher.
    • This suggests that the market may be pricing TMO at a premium compared to its peers, reflecting its strong growth prospects and market dominance. However, TMO's valuation metrics are still significantly lower than the industry average, indicating that the market may be undervaluing TMO compared to other companies in the industry.

  5. Cash Flow and Capital Management:

    • TMO's cash flow generation is significantly higher than its peers, considering their market caps.
    • This indicates TMO's strong financial health and ability to generate cash flow, which is essential for future growth and value creation.

  6. Growth and Future Prospects:

    • TMO's growth trends show a mixed picture compared to its peers. While it shows strong growth in profitability metrics, its sales growth has been lagging behind its peers.
    • TMO's significant year-to-year fluctuations in growth rates suggest that its growth may be less predictable and more susceptible to external factors.
    • Overall, TMO's growth profile is a mixed bag. While it shows strong growth in profitability metrics, its sales growth has been lagging behind its peers. TMO's significant year-to-year fluctuations in growth rates suggest that its growth may be less predictable and more susceptible to external factors.

  7. Potential for Investment:

    • TMO is an attractive investment for investors seeking exposure to the healthcare technology sector. Its strong cash flow generation, profitability, and dominant market position provide a solid foundation for future growth.
    • However, investors should be aware of TMO's lagging sales growth and higher debt levels, which could pose challenges in the future.

  8. Key Risks and Considerations:

    • TMO's lagging sales growth could indicate challenges in expanding its market share or capturing new growth opportunities.
    • TMO's higher debt levels could increase financial risk and limit its ability to take on new debt in the future.
    • TMO's lower returns on assets, equity, and capital compared to its peers suggest that it may face challenges in improving its efficiency and returns compared to its smaller, more focused competitors.

  9. Overall Assessment:

    • TMO is a financially healthy company with strong cash flow generation, profitability, and a dominant market position. However, its sales growth has been lagging behind its peers, and its debt levels are higher than its peers. Despite these weaknesses, TMO's strong financial performance and ability to generate returns despite its size indicate its overall financial health and potential for future growth.