Thermo Fisher Scientific Inc (TMO)

Conclusion

Thermo Fisher Scientific supplies life sciences instruments, reagents, consumables, specialty diagnostics and laboratory products, and offers biopharma services, across four segments. At 721.63 USD per share, the market capitalisation is 267.4 billion USD.

The verdict is overvalued. The price-to-earnings ratio of 37.7 compares with a ten-year median of 31.9, and enterprise value to EBITDA of 26.9 compares with a median of 19.9. Every other multiple also trades above its own ten-year median. The discounted cash flow gives 460.0 USD per share, and the fair value from historical multiples is 609.3 USD. The fair value band runs from 427.7 to 641.6 USD with a midpoint of 534.7 USD, a margin of safety of -25.9% at the current price. The reverse DCF implies growth of 14.0% a year, while revenue has compounded at 6.7% over five years and free cash flow per share has shrunk at -0.5% a year over the same period.

What holds the case up is free cash flow conversion of 107.2% over the trailing twelve months, an Altman Z-score of 4.27 and eight earnings beats in eight quarters. What would weaken it is net debt at 3.14 times EBITDA, a return on invested capital of 9.2% against a weighted cost of capital of 8.5%, and free cash flow per share that has not grown over three or five years. The price of 721.63 USD also sits above the top of the fair value band, at 641.6 USD.

Financial health

Financial strength is green, held up by an Altman Z-score of 4.27 and a current ratio of 1.81, and held back only by net debt at 3.14 times EBITDA and interest coverage of 5.83. The quick ratio is 1.11 and debt to equity is 0.76. The Altman zone is safe, although that model was designed for manufacturers, and this company is a life sciences tools and diagnostics business. Insolvency risk: low, about 0.18% by the estimate of the Ohlson model over one to two years. Net debt to EBITDA of 3.14 is the main watch point, and interest coverage of 5.83 leaves a moderate cushion. The company's interest expense is not reported in the data, so that cushion cannot be checked from the interest side.

Earnings quality

Earnings quality is green, with free cash flow conversion of 107.2% on a trailing basis and 102.0% over five years, both supportive. The accrual ratio is -1.04%, which means reported earnings are backed by cash. Stock-based compensation is 0.73% of revenue, and free cash flow after it is 7.25 billion USD. The share count has fallen at a five-year compound rate of -1.13%, consistent with buybacks. The Piotroski score is 5 out of 9. The Beneish M-score is not available. The company has beaten estimates in all eight of the last quarters, by an average of 3.39%. Analysts have raised the current-year estimates more than they lowered them, and next-year estimates show growth of 9.89%.

Profitability

Profitability is green. The operating margin is 18.0% against a ten-year median of 17.3%, and the net margin is 15.0% against 14.6%. The gross margin is 41.4% against a median of 44.8%, so it sits below its history. Margin stability is 19.5%. Return on invested capital is 9.2% against a weighted cost of capital of 8.5%, leaving a spread of 0.72% that is neutral, and the five-year median of return on invested capital is 10.5%. Return on equity is 12.9%. The DuPont split shows a net margin of 15.1%, an asset turnover of 0.40 and an equity multiplier of 2.07, so leverage contributes to the equity return. The economic return is thin, which matters for the valuation.

Growth

Growth is green, held up by revenue that grew in nine of the last ten years. Revenue compounded at -0.3% over three years, 6.7% over five and 10.1% over ten. Earnings per share compounded at 0.4% over three years, 2.3% over five and 13.8% over ten. Free cash flow per share compounded at -1.6% over three years, -0.5% over five and 10.9% over ten. The recent trend is weak, with three-year and five-year figures close to flat. The reverse DCF implies 14.0% growth, which is well above the five-year revenue rate of 6.7% and the five-year free cash flow per share rate of -0.5%.

Valuation

Valuation is red. The price-to-earnings ratio of 37.7 is 18.4% above its ten-year median of 31.9. Enterprise value to EBITDA of 26.9 is 35.3% above its median of 19.9. Price to free cash flow of 35.2 is 20.3% above its median of 29.3. The free cash flow yield is 2.8%. The discounted cash flow gives 460.0 USD per share, using a discount rate of 9.1% and a long-term growth rate of 2.5%. The fair value from historical multiples is 609.3 USD. The fair value band is 427.7 to 641.6 USD, with a midpoint of 534.7 USD and a margin of safety of -25.9%. These figures rest on fixed assumptions, including a 5% equity risk premium and capped growth. They are an order of magnitude, not a price target. The dividend yield is 0.25% and the payout on free cash flow is 8.9%.

Risks

Net debt at 3.14 times EBITDA would absorb more of the cash flow if earnings fell, and interest coverage of 5.83 leaves less room if rates rose. A return on invested capital of 9.2% close to the 8.5% cost of capital means growth adds little value unless returns improve. Free cash flow per share has not grown over three or five years, so the reverse DCF's implied 14.0% growth depends on a sharp turnaround. A gross margin of 41.4% below its median of 44.8% would hurt if it kept falling. The Beneish M-score is not available, and the company's debt maturity schedule and revenue by segment are not in the data, so these limits cannot be checked. The analysis also cannot see the interest expense that the company does not report.