Here's Why You Should Hold on to Thermo Fisher (TMO) Stock Now
Thermo Fisher Scientific Inc. TMO has been gaining from strength across the majority of its end markets. The company ended the fourth quarter with better-than-expected results. Robust segmental performance contributed to top-line growth. The significant revenue contributions from COVID-19 products and services buoy optimism. However, mounting operating expenses and stiff competition raise apprehension.
Over the past year, this Zacks Rank #3 (Hold) stock has gained 10.5% against the 13% fall of the industry and 12.2% rise of the S&P 500 composite.
The renowned medical and laboratory equipment provider has a market capitalization of $221.14 billion. Its fourth-quarter 2021 earnings surpassed the Zacks Consensus Estimate by 25.3%.
Over the past five years, the company’s earnings grew 24.2%, way ahead of the industry’s 5.1% rise and the S&P 500’s 2.8% increase. The company’s long-term expected growth rate of 14% for earnings compares with the industry’s long-term growth expectation of 14.6% and the S&P 500’s estimated 11.3% rise.
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Let’s delve deeper.
Factors at Play
Q4 Upsides: Thermo Fisher exited the fourth quarter with better-than-expected earnings and revenue results. The company delivered 8% organic growth in the base business, ahead of its expectations. The robust year-over-year revenue growth across the Analytical Instruments and the Laboratory Products and Biopharma Services segments appears promising. The company’s strategic acquisitions of PPD, Inc. and PeproTech raise investors’ confidence. The upbeat revenue and earnings guidance for 2022 is indicative that this strong growth momentum will continue.
COVID-Related Progress: Thermo Fisher generated $2.45 billion in COVID-19 response-related revenues during the fourth quarter of 2021. The emergence of the Omicron variant drove testing demand in the quarter. The company has also been engaged in a number of strategic initiatives to strengthen its COVID-19 response. In October 2021, Thermo Fisher introduced the MagMAX Wastewater Ultra Nucleic Acid Isolation Kit to combat the spread of COVID-19. Meanwhile, in December 2021, the company updated the Applied Biosystems TaqMan SARS-CoV-2 Mutation Panel to detect the highly contagious Omicron SARS-CoV-2 variant directly.
Strength in End Markets: We are upbeat about Thermo Fisher’s robust performance across the majority of its end markets during fourth-quarter 2021. Within the pharma and biotech end market, the company reported more than 20% growth driven by strong market dynamics, unique customer value proposition and customer supports across a wide range of exciting therapeutic areas. In industrial and applied, Thermo Fisher registered low-teens growth, primarily driven by growth in electron microscopy and chromatography, and mass spectrometry businesses. In diagnostics and healthcare, base business performance was strong, led by immunodiagnostics, clinical diagnostics, and transplant diagnostics performances.
Downsides
Mounting Expenses: During the fourth quarter, Thermo Fisher’s selling, general and administrative expenses increased 9.2%, whereas research and development expenses rose 4.3%. These escalating expenses led to a 481-basis point contraction in adjusted operating margin, building significant pressure on the bottom line.
Exposure to Foreign Currency: Thermo Fisher derives more than 50% of its revenues from the international market, which exposes it to fluctuations in foreign currency. In the past several years, the company’s earnings were affected significantly by headwinds from foreign exchange.
Tough Competition: Thermo Fisher faces significant competition from a broad range of manufacturers and third-party distributors. The competitive landscape is quite tough with changing technology and customer demands that require continuous research and development.
Estimate Trend
Over the past 90 days, the Zacks Consensus Estimate for Thermo Fisher’s 2022 earnings has moved 5.9% north to $22.52.
The Zacks Consensus Estimate for its 2022 revenues is pegged at $42.15 billion, suggesting a 7.5% rise from the 2021 reported figure.
Key Picks
A few better-ranked stocks in the broader medical space are Owens & Minor, Inc. OMI, Charles River Laboratories International, Inc. CRL and HealthEquity, Inc. HQY, each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Owens & Minor has a long-term earnings growth rate of 23.6%. Owens & Minor’s earnings surpassed estimates in the trailing four quarters, delivering a surprise of 32.4%, on average.
Owens & Minor has outperformed the industry over the past year. OMI has gained 30.2% against an 18% industry decline in the said period.
Charles River has a long-term earnings growth rate of 14%. Charles River surpassed earnings estimates in the trailing four quarters, delivering a surprise of 10.6%, on average.
Charles River has gained 21.3% against the industry’s 61.1% drop over the past year.
HealthEquity has a long-term earnings growth rate of 16.5%. HealthEquity’s earnings surpassed estimates in the trailing four quarters, delivering an average surprise of 9.8%.
HealthEquity has gained 16.5% against the industry’s 55.9% slump over the past year.
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