Thermo Fisher Scientific Shares Are Climbing Today - Are They Overvalued?

Thermo Fisher Scientific (TMO) stock climbed 0.2 % this afternoon. According to our metrics, the company seems overvalued at today's prices. In the below analysis, we will put Thermo Fisher Scientific's valuation in the context of its strong growth indicators and mixed market sentiment, which are also strong drivers for share price.

Thermo Fisher Scientific Inc. provides life sciences solutions, analytical instruments, specialty diagnostics, and laboratory products and biopharma services in the United States and internationally. The large-cap Industrials company is based in Waltham, United States and has 130,000 full time employees.

TMO Has a Higher P/E Ratio Than the Sector Average

Compared to the Industrials sector's average of 20.49, Thermo Fisher Scientific has a trailing twelve month price to earnings (P/E) ratio of 34.8 and an expected P/E ratio of 20.7. The P/E ratios are calculated by dividing the company's share price by its trailing 12 month of $14.64 or forward earnings per share of $24.59.

Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Thermo Fisher Scientific's P/E ratio is higher than its sector average of 20.49, we can deduce that the market is overvaluing the company's earnings.

Thermo Fisher Scientific Is Overvalued in Terms of Expected Growth

Thermo Fisher Scientific's PEG ratio is 3.74. This metric represents the company's earnings per share divided by its expected growth ratio, and is a useful complement to the price to earnings analysis, because it factors in growth to the valuation. A PEG ratio around or below 1 implies that the market in fairly valuing the company in terms of its growth estimates. But when the PEG ratio is higher, as in Thermo Fisher Scientific's case, it tells us the company is overvalued.

TMO Has an Average P/B Ratio

Traditionally, stock pickers used to focus primarily on finding issues that were trading significantly below their tangible asset value, to guarantee themselves a margin of safety. But such an approach would screen out many valuable securities because many profitable businesses -- especially those that heavily leverage information technology -- simply do not have many tangible assets compared to more capital intensive companies.

Therefore, modern value investors tend to focus less on absolute price to book value (P/B) ratios. Instead of singling out stocks with a P/B ratio of less than 1, they will compare the target company against its peer group. For Thermo Fisher Scientific, the P/B value is 4.5 while the average for the Industrials sector is 3.78.

TMO's Weak Cash Flow Generation Is Troubling

The table below shows that Thermo Fisher Scientific is not generating enough cash. A well run company will generally have cash flows that reflect the strength of its underlying business, and in Thermo Fisher Scientific's case, free cash flow is growing at an average rate of 0.0% with a coefficient of variability of 17498678813.6%. We can also see that cash flows from operations are evolving at a 0.0% rate, versus 0.0%:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cash Flow ($ k) YoY Growth (%)
2023-02-23 9,154,000 -2,219,000 11,373,000 -3.74
2022-02-24 9,312,000 -2,503,000 11,815,000 21.12
2021-02-25 8,289,000 -1,466,000 9,755,000 66.38
2020-02-26 4,973,000 -890,000 5,863,000 11.65
2019-02-27 4,543,000 -708,000 5,251,000 16.53
2018-02-28 4,005,000 -501,000 4,506,000

Thermo Fisher Scientific's Margins Are Strong

If you buy a stock for the long run, you want the underlying business model to be profitable. Gross margins tell you how much profit the company generates compared to the cost of revenue, which is the cost directly related to providing Thermo Fisher Scientific's goods and services. Operating margins, on the other hand, tell you how much of these profits the company keeps after you take overhead into account.

Thermo Fisher Scientific's Gross Margins

Date Reported Revenue ($ k) Cost of Revenue ($ k) Gross Margins (%) YoY Growth (%)
2023-02-23 44,915,000 -25,944,000 42 -16.0
2022-02-24 39,211,000 -19,573,000 50 0.0
2021-02-25 32,218,000 -16,214,000 50 13.64
2020-02-26 25,542,000 -14,214,000 44 -2.22
2019-02-27 24,358,000 -13,501,000 45 0.0
2018-02-28 20,918,000 -11,473,000 45

Thermo Fisher Scientific's Operating Margins

Date Reported Total Revenue ($ k) Operating Expenses ($ k) Operating Margins (%) YoY Growth (%)
2023-02-23 44,915,000 -10,464,000 19 -26.92
2022-02-24 39,211,000 -9,413,000 26 8.33
2021-02-25 32,218,000 -8,111,000 24 50.0
2020-02-26 25,542,000 -7,147,000 16 0.0
2019-02-27 24,358,000 -7,024,000 16 6.67
2018-02-28 20,918,000 -6,391,000 15

Thermo Fisher Scientific's cost of revenue is growing at a rate of -0.0% in contrast to -18.2% for operating expenses. Sales revenues, on the other hand, have experienced a 0.0% growth rate. As a result, the average gross margins growth is 0.1 and the average operating margins growth rate is 4.0, with coefficients of variability of 7.1% and 24.0% respectively.

Thermo Fisher Scientific Benefits From Positive Market Signals

The market sentiment regarding Thermo Fisher Scientific is overwhelmingly positive. The stock has an average rating of buy and target prices ranging from $693.0 to $520.0. TMO is trading -18.48% away from its target price of $625.14. 0.7% of the company's shares are tied to short positions, and 91.8% of the shares are held by institutional investors.

Date Reported Holder Percentage Shares Value
2023-06-30 Vanguard Group Inc 8% 32,580,120 $16,604,132,834
2023-06-30 Blackrock Inc. 8% 30,044,597 $15,311,928,855
2023-06-30 State Street Corporation 4% 16,116,956 $8,213,845,691
2023-06-30 Capital World Investors 3% 12,876,098 $6,562,174,773
2023-06-30 Morgan Stanley 3% 12,367,693 $6,303,071,241
2023-06-30 FMR, LLC 2% 9,210,141 $4,693,856,394
2023-06-30 Price (T.Rowe) Associates Inc 2% 9,119,347 $4,647,584,138
2023-06-30 Geode Capital Management, LLC 2% 6,978,869 $3,556,710,899
2023-06-30 Massachusetts Financial Services Co. 2% 6,794,864 $3,462,934,588
2023-06-30 Capital Research Global Investors 2% 6,091,325 $3,104,382,962
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.