Thermo Fisher Scientific Inc.
TMO
scaled a new 52-week high of $668.94 on Dec 30, before closing the session marginally lower at $665.45.
The company’s shares have charted a solid trajectory in recent times, appreciating 42.8% in the past year versus 11.9% growth of the
industry
and a 28.6% surge of the S&P 500 composite.
In the past five years, the company registered earnings growth of 20.7%, way ahead of the industry’s 3.3% rise and the S&P 500’s 2.8% increase. The company has a long-term expected growth rate of 14.0% compared with the industry’s 15.9% and the S&P 500’s 11.7%.
Thermo Fisher is well poised for growth in the upcoming quarters, backed by strength across all four of its end markets. The company recorded a colossal $2.05 billion in COVID-19 response-related revenues during third-quarter 2021, raising investors’ confidence. Robust international performance too instills optimism. The raised guidance for 2021 revenues and adjusted earnings per share (EPS) suggests that the bullish trend will continue.
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Let’s delve deeper.
Key Drivers
COVID-19-Related Progress:
Thermo Fisher undertook potent measures to combat the COVID-19 pandemic with the development of COVID-19 testing, vaccines and therapies. During the third quarter, the company generated $2.05 billion in COVID-19 response-related revenues. With the surge in the Delta variant, testing demand continued to grow globally throughout this period. A majority of COVID-19 response revenues was generated in the Life Sciences Solutions segment, with the remainder being recognized in the Products and Services and Specialty Diagnostics arms. Within vaccines and therapies for COVID-19, the company generated more than $500 million in the quarter.
Strength in End Markets:
The market is optimistic about Thermo Fisher’s strong performance in all four of its end markets, categorized by customer type or geography. In the third quarter, the pharma and biotech end market recorded more than 20% growth driven by strong market dynamics, unique customer value proposition and customer supports across a wide range of exciting therapeutic areas. Within academic and government, the company reported mid-single digits growth. In industrial and applied, the company witnessed mid-teens growth. In diagnostics and healthcare, although the company registered a decline, base business performance was strongly driven by immunodiagnostics, clinical diagnostics and transplant diagnostics performances.
Focus on International Markets:
We are upbeat about Thermo Fisher’s robust international performance and consistent expansion in high-growth and emerging markets. In the third quarter, revenues from Europe increased over 20%, while the same in Asia Pacific rose in low double digits. Revenues in China were reported in low single digits growth. Within China, the company registered strong COVID-response revenues, with new orders occupying about 10% of the quarter’s growth. Thermo Fisher plans to continue to strengthen its foothold in emerging markets like China and India. The company intends to translate this success to other high-priority opportunities in regions such as South Korea, Russia and Brazil.
Upbeat Guidance:
Thermo Fisher raised its revenue guidance for 2021 to $37.1 billion, indicating 15% growth from2020 levels (earlier guidance was $35.90 billion, calling for a rise of 11%). Full-year adjusted EPS guidance has been raised to $23.37, suggesting 20% increase from 2020 levels (previous guidance was $22.07, indicating 13% year-over-year growth).
Downsides
A host of factors have been deterring Thermo Fisher’s rally of late.
In the third quarter, Thermo Fisher’s gross margin of 51.4% contracted 88 basis points (bps) year over year on a 7.7% rise in the cost of revenues. Adjusted operating margin came in at 29.1%, reflecting a contraction of 439 bps. Moreover, exposure to adverse foreign exchange fluctuations and a stiff competitive landscape are likely to impede the company’s growth further.
Zacks Rank and Key Picks
Currently, Thermo Fisher carries a Zacks Rank #2 (Buy).
A few better-ranked stocks in the broader medical space that investors can consider are
Apollo Endosurgery, Inc.
APEN
,
Cerner Corporation
CERN
and
West Pharmaceutical Services, Inc.
WST
, each carrying a Zacks Rank #2. You can see
the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Apollo Endosurgery has a long-term earnings growth rate of 7%. The company‘s earnings surpassed estimates in the trailing four quarters, delivering a surprise of 25.6%, on average.
Apollo Endosurgery has outperformed its industry over the past year. APEN has gained 131.7% compared with the industry’s 11.9% growth.
Cerner has a long-term earnings growth rate of 13.3%. The company’s earnings surpassed estimates in the trailing three of the last four quarters and met estimates in one. CERN has a trailing four-quarter earnings surprise of 3.2%, on average.
Cerner has outperformed its industry in the past year. CERN has gained 18.7% against the industry’s 39.5% decline.
West Pharmaceutical has a long-term earnings growth rate of 27.6%. The company’s earnings surpassed estimates in the trailing four quarters, delivering an average surprise of 29.4%.
West Pharmaceutical has outperformed its industry in the past year. WST has rallied 66.4% compared with the industry’s 16.8% rise.
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