Foundation research

Thermo Fisher stock: a solid foundation for growth (NYSE: TMO)

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Investment thesis

Thermo Fisher Scientific (NYSE: TMO) is the world’s leading manufacturer of scientific apparatus, instruments, diagnostic products and related services. The business offers an excellent combination of stability and growth, and has a highly complementary product line and favorable conditions revenue profiles in multiple markets that will ensure future growth. Thermo Fisher has long been an outstanding investment option, and I believe it will continue to be so for some time to come. Here are the main reasons:

  • All of Thermo Fisher’s segments are growing at a healthy pace, and overall growth will remain strong despite lower COVID-related product revenue.
  • Thermo Fisher’s ability to generate cash is impressive and looks solid going forward.
  • High profit margins illustrate a wide economic moat, operational efficiency and quality of growth.

Strong performance in all segments

Since my previous post, Thermo Fisher released Q2 2022 results and again posted strong results. Overall revenue increased 18% year-over-year, with strong performance across all of their segments. The pharmaceutical and biotech industry saw growth in the mid-teens, academia and government saw mid-single-digit growth, and industry and applied applications saw double-digit growth. These are exceptional given the challenges of COVID lockdowns, supply chain issues and cost control.

Several new products were launched earlier this year, and they are already driving Thermo Fisher’s growth. An automated sample preparation platform (AccelerOme), Thermo Scientific Direct Mass Technology mode for its mass spectrometers and a cloud-based software platform (Thermo Scientific RDO) help customers achieve greater efficiency in their research and operating environment. The most exciting part of the results was the strong increase in the services segment. Three-month services revenue nearly doubled from $2.0 billion to $4.0 billion. As the service segment is a higher margin business, this will further improve Thermo Fisher’s profit margin in the future.

Disaggregated income

Disaggregated income (SEC Filings)

Strong operating cash flow

Thermo Fisher has always been great at generating operating cash flow, but they’ve taken that to the next level over the past two years. Cash flow from operations was $2.0 billion in 2012, and that figure has increased to $8.8 billion over the last twelve months. With steady organic growth mentioned above and inorganic growth (eg the recent acquisition of PPD), Thermo Fisher will continue to grow and operating cash flow will increase even further.

In particular, I expect strong synergies from the acquisition of PPD. PPD is the global industry leader in providing services to pharmaceutical and healthcare companies. They accelerate the drug and medical device development process by providing clients with tailored strategies for clinical development and analytical services. For example, Thermo Fisher supported Moderna’s development of the Spikevax COVID vaccine, and the two companies decided in February to extend this collaboration to Moderna’s entire pipeline. By combining this tremendous service expertise with impressive life science product lines, I believe Thermo Fisher can now offer the complete package to its customers and partners.

Strong profit margins

Thermo Fisher has a very robust economic fluke gained through its technological superiority, change cost and brand recognition. Additionally, their management does a great job of managing the manufacturing site and managing the supply chain efficiently. A strong economic moat and high quality management decisions are demonstrated by high profitability measures.

High profit margins (EBIT, EBITDA and net profit margins) represent a wide economic moat. Thermo Fisher is able to charge a premium on their products because they offer better products with advanced technology and strong brand recognition. Meanwhile, the high returns on equity and capital demonstrate manufacturing efficiency and effective supply chain management. I expect them to maintain these quality parameters in the future as well.

Profitability indicator

Profitability indicator (Looking for Alpha)

Estimation of intrinsic value

I used the DCF model to estimate intrinsic value. For the estimate, I used EBITDA ($12.7 billion) as the cash flow indicator and the current WACC of 8.0% as the discount rate. For the base case, I assumed 17% EBITDA growth (5-year average revenue growth) for the next 5 years and zero growth thereafter (zero terminal growth). For the bullish and very bullish case, I assumed EBITDA growth of 19% and 21%, respectively, for the next 5 years and zero growth thereafter.

The estimate revealed that the current share price represents an upside of 20-25%. Their organic growth from significant R&D efforts and inorganic growth from acquisitions will allow Thermo Fisher to continue to grow, and I expect them to realize this advantage.

Price target

Upside down

Base case

$672.88 12%

Bullish case

$724.63 20%

Very bullish case

$779.78 30%

The assumptions and data used for the price target estimation are summarized below:

  • WACC: 8.0%
  • EBITDA growth rate: 17% (base case), 19% (bullish case), 21% (very bullish case)
  • Current EBITDA: $12.7 billion
  • Current stock price: $596.83 (08/15/2022)
  • Tax rate: 20%

Cappuccino Stock Rating

Weighting TMO
Strength of the economic gap 30% 5
Financial solidity 30% 4
Growth rate vs sector 15% 4
Safety margin 15% 4
Sector outlook ten% 4
Globally 4.3

economic gap

Thermo Fisher has a very strong moat to protect its market share. They are technologically advanced and enjoy a strong reputation. Additionally, customers could incur substantial switching costs if they had to change equipment lines, which helps retain existing customers. A strong R&D effort and key acquisitions will keep this moat beautiful and wide.

Financial solidity

Thermo Fisher recently took on long-term debt to acquire PPD. However, they have an excellent ability to generate operating cash and their profit margins are very high. Moreover, their current ratio and quick ratio are well within the range of peers.

Rate of growth

Thermo Fisher’s core business will continue to grow strongly in the future. I think the acquisition of PPD is an excellent initiative and will bring synergies in the future. Some of their revenue growth, however, will be offset by lower COVID-related revenue.

Safety margin

Thermo Fisher’s stock price is 20-25% undervalued, providing a good cushion for investors. However, due to recent market volatility, some tech and growth stocks are still 40-50% below their intrinsic value, making it difficult to justify the higher rating for Thermo Fisher at this point.

Sector outlook

The R&D efforts of pharmaceutical companies, research institutes, government and universities are only increasing, so the demand for Thermo Fisher’s products and services will increase accordingly. Thermo Fisher’s growth will go hand in hand with changing healthcare needs.


Although not at an alarming level, the significant long-term debt incurred over the past two years is something the investor should watch out for. The total debt level of $30 billion is certainly high relative to its peers and the historical level of the company. In addition, the total debt to equity ratio (71%) is higher than that of its peers. Therefore, the investor should closely monitor Thermo Fisher’s debt management going forward.

Thermo Fisher’s consumables segment will decline as sales of COVID-related products are disappearing. Due to the unpredictable nature of the pandemic and emerging variants, it is difficult to assess how quickly these revenues could decline. Therefore, it introduces a fair amount of uncertainty into the Revenues from COVID-related products, and will make the stock more volatile until we have a better idea of ​​the revenue profile ahead.


Thermo Fisher has been an outstanding investment option for the investor for a few decades now, and I see no sign of that changing in the foreseeable future. The company has superb product lines based on cutting-edge technology and a strong R&D team to drive organic growth. Moreover, TMO does not hesitate to acquire key companies. The company’s significant indebtedness and fluctuations linked to unforeseeable events COVID revenue introduces some uncertainty, but overall I expect 20-25% upside going forward.

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