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Here's Why You Should Hold on to Thermo Fisher (TMO) for Now

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Thermo Fisher Scientific Inc. (TMO - Free Report) is well poised for growth backed by strong end markets, driven by robust fundamentals in life sciences and strong economic activity globally.  The company’s raised 2021 guidance buoys optimism. However, foreign currency fluctuations and economic uncertainty continue to pose a threat to the company.

Over the past year, the Zacks Rank #3 (Hold) company has outperformed its industry. It has gained 27.6% compared with the 12.8% rise of its industry and the S&P 500’s 31.5% rise.

The renowned medical and laboratory equipment provider has a market capitalization of $225.32 billion. The company projects 13% growth for the next five years and expects to maintain strong segmental performance. Further, it delivered a positive earnings surprise of 10.40%, on average, over the trailing four quarters.

Riding on the company’s current business growth and bullish near-term prospects, this stock is worth holding on to for now.

Key Growth Catalysts

Strength in End Markets: In second-quarter 2021, Thermo Fisher witnessed strength in all four of its end markets, categorized either by customer type or geography. Pharma and biotech registered more than 30% growth in the quarter driven by strong underlying market conditions, the benefit of unique customer value proposition and the company’s major role in supporting customers across a wide range of therapeutic areas, including a significant role in COVID-19 vaccines and therapies. Robust growth was seen across all businesses serving these customers, including bioproduction, pharma services, biosciences, chromatography and mass spectrometry, and in research and safety market channels.

In academics and government, the company grew 35% driven by robust customer activity globally. In particular, the company saw strong growth across many businesses, including biosciences, electron microscopy, and the research and safety market channel.

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Focus on International Markets: Thermo Fisher boasts strong international operations and has witnessed consistent growth in high-growth and emerging markets. In the quarter under review, North America grew 25%, Europe grew 35%, Asia Pacific and China grew just under 30%, and rest of the world grew low double digits.  The company plans to continue strengthening its foothold in emerging markets, such as China and India, and translate this success to other high-priority opportunities in regions such as South Korea, Russia, and Brazil.

Raised 2021 Guidance: The company has raised its revenue guidance for 2021 to $35.90 billion, indicating 11% reported growth over 2020 (earlier guidance was $35.6 billion). The full-year adjusted earnings per share guidance has been raised to $22.07, indicating 13% growth over 2020 (previous guidance was $21.97).

Downsides

On the flip side, some factors have been deterring the stock’s rally of late.

Exposure to Foreign Currency: Thermo Fisher derives more than 50% of its revenues from the international market, exposing it to foreign currency fluctuations. In the past several years, the company’s earnings were affected significantly by foreign exchange headwinds.

Economic Uncertainty Continues to Hamper Growth: Thermo Fisher’s business depends heavily on general economic conditions. The company makes scientific instruments that are primarily of big-ticket sizes and non-life-sustaining in nature. The company has been witnessing headwinds in the government and academic markets.

Estimate Trends

Thermo Fisher has been witnessing a positive estimate revision trend for 2021. Over the past 90 days, the Zacks Consensus Estimate for its earnings has moved 0.3% north to $22.08.

The Zacks Consensus Estimate for 2021 revenues is pegged at $36.01 billion, suggesting 11.8% growth from the year-ago reported number.

Key Picks

A few better-ranked stocks from the broader medical space are Alcon Inc (ALC - Free Report) , McKesson Corporation (MCK - Free Report) and Biolase, Inc. (BIOL - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of Zacks #1 Rank (Strong Buy) stocks here.

Alcon has an estimated long-term earnings growth rate of 18%.

McKesson has an estimated long-term earnings growth rate of 8%.

Biolase has a projected long-term earnings growth rate of 15%.


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