Here's Why Investors Should Retain Thermo Fisher (TMO) Stock

Thermo Fisher Scientific Inc. TMO has been gaining from continued strength across its certain end markets. The company beat the Zacks Consensus Estimate of earnings and revenues. Its strong results in the high-growth and emerging markets seem impressive. Yet, a weak margin scenario and persistent foreign exchange headwinds raise apprehension.

In the past year, this Zacks Rank #3 (Hold) stock has lost 4.4% compared with a 33.6% fall of the industry and a 14.7% decline of the S&P 500 composite.

This renowned medical and laboratory equipment provider has a market capitalization of $212.96 billion. Its earnings surpassed estimates in the trailing four quarters, the average surprise being 19.53%.

In the past five years, the company’s earnings have risen 24.2% compared with the industry’s 10.0% rise and the S&P 500’s 13.4% increase. The company’s long-term expected growth rate of 14% for earnings compares with the industry’s long-term growth expectation of 15.0% and the S&P 500’s estimated 11.2% rise.

Let’s delve deeper.

Factors at Play

Q2 Upsides: Thermo Fisher exited the second quarter with better-than-expected results on 3% organic revenue growth. Core organic revenue growth (considering the impact of PPD revenue, excluding the impacts of COVID-19 testing revenue) was 13%. The Pharma and Biotech end market delivered growth in the mid-teens. Academic and Government grew in the mid-single-digits while the Industrial and Applied end market grew in low double-digits in the reported quarter.

As a major development, in May 2022, Thermo Fisher increased the revenue synergy outlook by $100 million to $250 million in year three and the cost synergies in that year by $25-$100 million.

COVID-Related Progress: Thermo Fisher continued to play a very meaningful role in terms of COVID-19 testing, vaccines and therapies-related advancement. In the second quarter of 2022, the company generated $630 million of COVID-19 testing revenues. For full-year 2022, the company expects a $500 million additional contribution of COVID-19 testing revenues, which include a $400-million beat in Q2 and a $100-million increase in the assumption for the third quarter.

Thermo Fisher Scientific Inc. Price

Thermo Fisher Scientific Inc. Price

Thermo Fisher Scientific Inc. price | Thermo Fisher Scientific Inc. Quote

Focus on International Markets: We are upbeat about Thermo Fisher’s strong international operations and consistent upside in high-growth and emerging markets. In the second quarter of 2022, Asia Pacific grew in the low double digits, with China growing over 20%. Growth in China was primarily driven by increasing demand for COVID-19 testing through the second quarter.

Downsides

Dull Sales Scenario: In terms of end markets, Thermo Fisher’s diagnostics and healthcare revenues declined 20% in the second quarter. Within Specialty Diagnostics, reported revenues declined 11%, while organic revenues dropped 8% year over year.

Weak Margins: In the second quarter, Thermo Fisher’s gross margin of 43.1% contracted 744 basis points (bps) year over year on a 36.1% rise in the cost of revenues. Selling, general and administrative expenses increased 7.8%, while research and development expenses were up 6.4% year over year. The adjusted operating margin for the quarter came in at 23.9%, reflecting a contraction of 552 bps.

Forex Woes: 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 a headwind from foreign exchange.

Estimate Trend

Thermo Fisher has been witnessing a positive estimate revision trend for 2022. In the past 60 days, the Zacks Consensus Estimate for Thermo Fisher’s 2022 earnings has moved 1.01% north to $22.94.

The Zacks Consensus Estimate for its 2022 revenues is pegged at $43.16 billion, suggesting a 10.1% rise from the 2021 reported figure.

Key Picks

A few better-ranked stocks in the broader medical space that investors can consider are AMN Healthcare Services, Inc. AMN, ShockWave Medical, Inc. SWAV and McKesson Corporation MCK.

AMN Healthcare has a long-term earnings growth rate of 3.2%. The company surpassed earnings estimates in the trailing four quarters, delivering a surprise of 15.7%, on average. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AMN Healthcare has outperformed its industry in the past year. AMN has lost 12.8% compared with the industry’s 38.3% fall.

ShockWave Medical, sporting a Zacks Rank #1 at present, has an estimated growth rate of 33.1% for 2023. The company’s earnings surpassed estimates in all the trailing four quarters, the average beat being 180.1%.

ShockWave Medical has outperformed its industry in the past year. SWAV has gained 31.1% against the industry’s 32.6% fall.

McKesson has an estimated long-term growth rate of 9.9%. The company surpassed earnings estimates in the trailing three quarters and missed in one, delivering a surprise of 13%, on average. It currently carries a Zacks Rank #2 (Buy).

McKesson has outperformed its industry in the past year. MCK has gained 76% against the industry’s 14.5% fall.

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