Thermo Fisher (NYSE:TMO) stock is one of those champion holdings that many investors don’t know about. However, for people fortunate enough to buy TMO stock previously, it’s been a great ride.
Over the past 10 years, Thermo Fisher is up a cool 810%. It’s been a smooth journey as well. The company has consistently grown earnings over that stretch, and has had a steadily rising stock chart to go with it.
So why isn’t Thermo Fisher more well known? The company operates some under-the-radar businesses. Its primary businesses include things such as laboratory equipment, instrument systems, chemicals, and related software. Not glamorous stuff. However, it’s vital. Thermo Fisher provides tools that the world’s top researchers use to advance the frontiers of medicine. And, for shareholders, it’s been an extremely profitable partnership. However, shares have been volatile in recent weeks for two primary reasons. Here’s why.
The first of these, not surprisingly, is novel coronavirus testing. Given that Thermo Fisher is one of the top testing companies worldwide, it’s only natural that the company got into the testing market for this ailment as well. The thing is that it doesn’t really matter to a company of Thermo Fisher’s size what they generate off any one short-term event like this.
TMO stock sold off two weeks ago on news that Abbott (NYSE:ABT) got its rapid Covid-19 test approved, and the federal government will buy those instead. In fact, the government will buy 150 million tests from Abbott, but they’re only paying $5 for each test. So that’s $750 million of revenue going to Abbott, and probably at a small profit margin.
Yet Abbott’s stock spiked 10% initially on the news, adding $18 billion in market capitalization for a $750 million order that won’t recur too frequently – the Covid-19 vaccines are coming soon after all. Similarly, Thermo Fisher and other testing companies tanked, even though the amount of Covid-19 revenue they would have generated would have been immaterial to the overall size of the companies in play.
If you’re a tiny biotech company, every dollar of revenues matters. But for Thermo Fisher, this was small potatoes compared to the normal recurring revenue streams that it has been building for decades. Investors shouldn’t lose any sleep over Thermo Fisher losing this deal to Abbott.
Qiagen: Deal or No Deal?
The second matter is Thermo Fisher’s proposed acquisition of Qiagen (NYSE:QGEN). While Qiagen is listed on the New York Stock Exchange, it’s a foreign company, and its primary listing is in Europe. Thus, Thermo Fisher was prepared to offer 39 Euros per share for the company.
This would have been a huge deal. Thermo Fisher was prepared to shell out $11.5 billion for Qiagen. Qiagen is a leading diagnostics company. In 2019, Qiagen did more than $1.5 billion of revenue. Thus, this would have made a big impact for Thermo Fisher (many multiples of the potential upside from Covid-19 testing). And likely TMO stock ran to a degree as it seemed like Thermo Fisher was buying Qiagen out cheap.
Alas, it didn’t pan out. Qiagen’s shareholders voted down the proposed merger, saying the offer was too low. With Qiagen’s European shares now trading in the low-to-mid 40 Euros range, that seems like it was the right decision. Thermo Fisher made a bold bid trying to snag Qiagen up at a bargain, but it didn’t pan out.
Valuation, Not Covid-19, Is the Real Sticking Point
As is usually the case with Thermo Fisher, the real problem here isn’t short-term business matters such as the Covid-19 tests, rather it’s valuation. TMO stock is expensive. And it’s almost always that way, meaning that the only way to ever own it is to pay a high price for it.
Over the past four years, Thermo Fisher has traded between a 30x and 48x price-earnings ratio, with it recently hitting that 48x level before the news-driven stock price decline of late. As early as 2014, the stock traded for 33x earnings, and you’d have to go back to the Financial Crisis to find the last time you could buy TMO stock at less than 20x earnings. All that to say that if you want to own the stock, don’t count on it dropping to a “normal” P/E ratio.
You might say who cares that it sells at 44x trailing earnings, the market loves growth stocks. And that’s true. However, Thermo Fisher is not a hyper-growth stock either; this isn’t a pure software company. Over the last five years, Thermo Fisher has grown revenue at 9% per year. That’s solid, but it’s not usually the sort of thing you slap a 44x P/E ratio on. However, it has a better forward P/E ratio, currently in the high 20s, as long as you accept non-GAAP figures.
TMO Stock Verdict
All this leads up to my takeaway. If you are a long-term investor, and you want to buy the world’s highest-quality companies and hold on for many years, Thermo Fisher should certainly be on your shortlist. This is a phenomenal company, and there are all sorts of long-term tailwinds to power this thing higher for many years or even decades to come. If you are going to buy and hold, TMO stock is a great pick.
However, the valuation here is really a stretch. I love the business model, and I fully intend to be a long-term shareholder of Thermo Fisher. However, I really struggle to pay this high a P/E for something that grows at a single-digit growth rate. You’ll eventually do well, assuming you hold long enough, but the next few years could be bumpy as Thermo Fisher grows into its outsized valuation.
As such, if you’re a patient investor and don’t mind paying up for a primo stock, Thermo Fisher is a decent buy even now. For most people, however, this is one to have at the top of your watchlist. With any luck, TMO stock might slide a quick 10% or 15% if this tech sell-off gets going again in coming weeks. That’d be the time to start buying into this fantastic company.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.