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Here's Why Investors Should Retain Thermo Fisher (TMO) Stock

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Thermo Fisher Scientific Inc. (TMO - Free Report) has been gaining from continued strength across its certain end markets. The company beat the Zacks Consensus Estimate of earnings and revenues. Its strong results in the high-growth and emerging markets seem impressive. Yet, a weak margin scenario and persistent foreign exchange headwinds raise apprehension.

In the past year, this Zacks Rank #3 (Hold) stock has lost 4.4% compared with a 33.6% fall of the industry and a 14.7% decline of the S&P 500 composite.

This renowned medical and laboratory equipment provider has a market capitalization of $212.96 billion. Its earnings surpassed estimates in the trailing four quarters, the average surprise being 19.53%.

In the past five years, the company’s earnings have risen 24.2% compared with the industry’s 10.0% rise and the S&P 500’s 13.4% increase. The company’s long-term expected growth rate of 14% for earnings compares with the industry’s long-term growth expectation of 15.0% and the S&P 500’s estimated 11.2% rise.

Let’s delve deeper.

Factors at Play

Q2 Upsides: Thermo Fisher exited the second quarter with better-than-expected results on 3% organic revenue growth. Core organic revenue growth (considering the impact of PPD revenue, excluding the impacts of COVID-19 testing revenue) was 13%. The Pharma and Biotech end market delivered growth in the mid-teens. Academic and Government grew in the mid-single-digits while the Industrial and Applied end market grew in low double-digits in the reported quarter.

As a major development, in May 2022, Thermo Fisher increased the revenue synergy outlook by $100 million to $250 million in year three and the cost synergies in that year by $25-$100 million.

COVID-Related Progress: Thermo Fisher continued to play a very meaningful role in terms of COVID-19 testing, vaccines and therapies-related advancement. In the second quarter of 2022, the company generated $630 million of COVID-19 testing revenues. For full-year 2022, the company expects a $500 million additional contribution of COVID-19 testing revenues, which include a $400-million beat in Q2 and a $100-million increase in the assumption for the third quarter.

Focus on International Markets: We are upbeat about Thermo Fisher’s strong international operations and consistent upside in high-growth and emerging markets. In the second quarter of 2022, Asia Pacific grew in the low double digits, with China growing over 20%. Growth in China was primarily driven by increasing demand for COVID-19 testing through the second quarter.

Downsides

Dull Sales Scenario: In terms of end markets, Thermo Fisher’s diagnostics and healthcare revenues declined 20% in the second quarter. Within Specialty Diagnostics, reported revenues declined 11%, while organic revenues dropped 8% year over year.

Weak Margins: In the second quarter, Thermo Fisher’s gross margin of 43.1% contracted 744 basis points (bps) year over year on a 36.1% rise in the cost of revenues. Selling, general and administrative expenses increased 7.8%, while research and development expenses were up 6.4% year over year. The adjusted operating margin for the quarter came in at 23.9%, reflecting a contraction of 552 bps.

Forex Woes: Thermo Fisher derives more than 50% of its revenues from the international market, which exposes it to fluctuations in foreign currency. In the past several years, the company’s earnings were affected significantly by a headwind from foreign exchange.

Estimate Trend

Thermo Fisher has been witnessing a positive estimate revision trend for 2022. In the past 60 days, the Zacks Consensus Estimate for Thermo Fisher’s 2022 earnings has moved 1.01% north to $22.94.

The Zacks Consensus Estimate for its 2022 revenues is pegged at $43.16 billion, suggesting a 10.1% rise from the 2021 reported figure.

Key Picks

A few better-ranked stocks in the broader medical space that investors can consider are AMN Healthcare Services, Inc. (AMN - Free Report) , ShockWave Medical, Inc. (SWAV - Free Report) and McKesson Corporation (MCK - Free Report) .

AMN Healthcare has a long-term earnings growth rate of 3.2%. The company surpassed earnings estimates in the trailing four quarters, delivering a surprise of 15.7%, on average. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AMN Healthcare has outperformed its industry in the past year. AMN has lost 12.8% compared with the industry’s 38.3% fall.

ShockWave Medical, sporting a Zacks Rank #1 at present, has an estimated growth rate of 33.1% for 2023. The company’s earnings surpassed estimates in all the trailing four quarters, the average beat being 180.1%.

ShockWave Medical has outperformed its industry in the past year. SWAV has gained 31.1% against the industry’s 32.6% fall.

McKesson has an estimated long-term growth rate of 9.9%. The company surpassed earnings estimates in the trailing three quarters and missed in one, delivering a surprise of 13%, on average. It currently carries a Zacks Rank #2 (Buy).

McKesson has outperformed its industry in the past year. MCK has gained 76% against the industry’s 14.5% fall.

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