Advertisement
Canada markets closed
  • S&P/TSX

    22,465.37
    +165.57 (+0.74%)
     
  • S&P 500

    5,308.13
    +4.86 (+0.09%)
     
  • DOW

    39,806.77
    -196.82 (-0.49%)
     
  • CAD/USD

    0.7332
    -0.0010 (-0.14%)
     
  • CRUDE OIL

    79.29
    -0.51 (-0.64%)
     
  • Bitcoin CAD

    97,181.44
    +6,348.70 (+6.99%)
     
  • CMC Crypto 200

    1,515.35
    +160.94 (+11.88%)
     
  • GOLD FUTURES

    2,417.70
    -20.80 (-0.85%)
     
  • RUSSELL 2000

    2,102.50
    +6.78 (+0.32%)
     
  • 10-Yr Bond

    4.4370
    +0.0170 (+0.38%)
     
  • NASDAQ

    16,794.88
    +108.91 (+0.65%)
     
  • VOLATILITY

    12.15
    +0.16 (+1.33%)
     
  • FTSE

    8,424.20
    +3.94 (+0.05%)
     
  • NIKKEI 225

    39,135.91
    +66.23 (+0.17%)
     
  • CAD/EUR

    0.6752
    -0.0004 (-0.06%)
     

Does This Valuation Of Thermo Fisher Scientific Inc. (NYSE:TMO) Imply Investors Are Overpaying?

Key Insights

  • Thermo Fisher Scientific's estimated fair value is US$439 based on 2 Stage Free Cash Flow to Equity

  • Current share price of US$555 suggests Thermo Fisher Scientific is potentially 27% overvalued

  • Our fair value estimate is 31% lower than Thermo Fisher Scientific's analyst price target of US$637

In this article we are going to estimate the intrinsic value of Thermo Fisher Scientific Inc. (NYSE:TMO) by projecting its future cash flows and then discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

ADVERTISEMENT

Check out our latest analysis for Thermo Fisher Scientific

Crunching The Numbers

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

Levered FCF ($, Millions)

US$7.06b

US$8.82b

US$9.73b

US$10.2b

US$10.6b

US$11.0b

US$11.3b

US$11.6b

US$11.9b

US$12.2b

Growth Rate Estimate Source

Analyst x7

Analyst x8

Analyst x7

Analyst x1

Est @ 3.85%

Est @ 3.32%

Est @ 2.94%

Est @ 2.68%

Est @ 2.50%

Est @ 2.37%

Present Value ($, Millions) Discounted @ 7.9%

US$6.5k

US$7.6k

US$7.8k

US$7.6k

US$7.3k

US$7.0k

US$6.7k

US$6.3k

US$6.0k

US$5.7k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$68b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.1%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 7.9%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = US$12b× (1 + 2.1%) ÷ (7.9%– 2.1%) = US$215b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$215b÷ ( 1 + 7.9%)10= US$101b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$169b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of US$555, the company appears slightly overvalued at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
dcf

Important Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Thermo Fisher Scientific as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 7.9%, which is based on a levered beta of 0.974. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for Thermo Fisher Scientific

Strength

  • Debt is well covered by earnings and cashflows.

Weakness

  • Earnings declined over the past year.

  • Dividend is low compared to the top 25% of dividend payers in the Life Sciences market.

  • Expensive based on P/E ratio and estimated fair value.

Opportunity

  • Annual earnings are forecast to grow faster than the American market.

Threat

  • Revenue is forecast to grow slower than 20% per year.

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. What is the reason for the share price exceeding the intrinsic value? For Thermo Fisher Scientific, we've compiled three further factors you should assess:

  1. Risks: We feel that you should assess the 2 warning signs for Thermo Fisher Scientific we've flagged before making an investment in the company.

  2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for TMO's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.

  3. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here