Thermo Fisher – Still One of the Best Compounders in Healthcare
Shares have revalued, but this high-margin, recurring-revenue machine still looks attractive.
Last week, Thermo Fisher released its second-quarter results, which beat consensus estimates and allowed management to raise its full-year 2025 outlook. The response? $TMO shares jumped a massive 11% in the following trading session, which was especially notable considering the report wasn’t particularly strong when viewed purely in terms of the numbers. Management only raised the low-end of the guided range and beat expectations by a small margin.
However, more importantly, the results, and particularly management’s commentary during the earnings call, inspired confidence and optimism for the years ahead, which was precisely what investors needed amid poor sentiment and operational uncertainty driven by outside factors. With its positive commentary, management was able to address investor concerns and convey a very bullish outlook.
In other words, the real catalyst last week was renewed investor confidence in the company.
You see, up until last week, Thermo Fisher shares have been clearly out of favor with investors so far in 2025 and over the last twelve months. Prior to last week’s pop, TMO shares were down 20% in 2025 and 25% over the last 12 months, far underperforming the broader market. This was mostly driven by three factors:
Tough post-COVID comparables held back growth → TMO generated considerable COVID-induced revenues during the 2020-2022 period. However, as the pandemic eased, these revenues gradually disappeared, becoming a significant drag on TMO’s reported growth. This resulted in negative growth during 2023 and 2024, despite the company’s overall performance being solid. Nevertheless, investors weren’t impressed, and pandemic-driven investor enthusiasm waned. Yet, this had nothing to do with the business’s underlying performance.
Concerns around Trump’s cancellation of scientific research grants → In early 2024, within the first weeks of his presidency, Trump cut research grants. This resulted in lowered outlooks for scientific research, which raised concerns about potential demand for TMO machines and consumables. However, what Wall Street overlooked here is that TMO’s exposure to these grants is under 5% of its overall business. Additionally, this cancellation of grants has already been paused again. Yes, concerns were overblown.
Tariff concerns -> TMO is a global company, getting parts from all around the world and shipping these to dozens of other countries. This made tariffs another concern. Notably, TMO has limited exposure to high-tariff countries, such as China, and through its strong and global supply chain, the actual tariff impact has proven to be limited!
I have already argued multiple times this year that these issues were significantly overblown, as was the subsequent investor pessimism, especially given that business fundamentals remained excellent and highly promising. This is precisely why I started accumulating shares in early 2025, building a decent-sized position in Thermo Fisher at bargain prices.
This weakness we have been seeing in Thermo Fisher shares has been nothing but an excellent opportunity to pick up shares in a brilliant business at a considerable discount. This company still has a massive moat, a favorable and unique revenue stream, extremely deep customer connections that span decades, and a dominant global position in a very compelling industry.
To provide some background, Thermo Fisher is one of the largest suppliers of life sciences and pharmaceutical equipment. It provides innovative solutions that enable advancements in research, diagnostics, and laboratory operations. In other words, the company is the picks and shovels in the biopharma, clinical diagnostics, healthcare, and life sciences industries.
In these industries, it operates a monopoly together with Danaher, which together capture a considerable share in a highly fragmented market. Crucially, it is this dominant position that gives the company a massive moat and significant competitive advantages. Size, relationships, and decades of industry know-how rule this industry, and TMO fully benefits from it.
Additionally, Thermo Fisher has an incredibly high-quality revenue stream through its closed system, as TMO equipment can only be operated using TMO consumables, which include pipette tips, filters, reagents, and chemicals. This creates a powerful lock-in effect through which TMO not only sells its industry-leading equipment but also generates massive amounts of revenue from consumables. In fact, the company today only derives a meager 17% of its revenue from equipment sales, with the remaining 83% coming from these consumables.
Even more perfect, these revenues from consumables are also generally high-margin, contract-based, and, therefore, recurring. Additionally, these are typically long-term contracts due to the high switching costs and the average lifespan of TMO equipment, which ranges from 5 to 12 years. Yes, anytime the company sells its equipment, it is guaranteed 5-12 years of recurring revenue from consumables. As a result, TMO is a great anti-cyclical pick.
To me, this all makes Thermo Fisher the ideal way to benefit from the compounding growth of the healthcare and pharmaceutical industries, and one of my personal favorites, driven by an aging population and a growing need for health solutions.
This company has everything going for it and is excellently positioned to remain a strong compounder in the decades ahead, driven by continued growth in the pharma and life sciences industries, TMO’s brilliant positioning, and its competitive edge.
As a result, TMO management is confident it will be able to realize a high-single-digit revenue CAGR and mid-teens EPS CAGR well into the next decade, which is nothing short of brilliant for such a stable and reliable business.
And yet, at times, you were only paying 16x earnings for this best-in-class business – and so I accumulated.
However, the big questions now are:
How is Thermo Fisher doing under the hood right now?
Are shares still a good buy after last week’s share price pop?
Let’s take a closer look at TMO’s Q2 numbers and developments to once again make up the balance, updating financial projections and my target price!
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Thermo Fisher delivered a strong Q2 report
While the double-digit share price jump last week wasn’t necessarily driven by the quarterly numbers, TMO did impress with them, beating consensus estimates on top and bottom lines and delivering numbers at the high end or above management’s own guidance.
According to management, this was driven by excellent execution and its ability to navigate a challenging environment amid global uncertainty, subsequent customer caution, and tariffs.
Starting at the top, TMO delivered total Q2 revenue of $10.85 billion, which was up 3% YoY. This consisted of 2% organic growth, a minor contribution from acquisitions, and a 1% foreign exchange tailwind due to the weakening dollar, offset by a 1% pandemic-related revenue headwind, as TMO is still shedding the last bit of COVID-19-related revenue.
Nevertheless, this was a very solid result. The business performed mostly in line with expectations, which is all we can ask for in a challenging operating environment. Crucially, it shows an acceleration in growth compared to the last two years and last quarter, even as the operating environment has weakened. Positively, TMO’s tailwinds are more substantial than current customer caution.
By geography, its business in North America and Europe both grew in the low single digits, offset by a low single-digit decline in the Asia Pacific and a high single-digit decline in China, although the latter was better than expected due to a lesser impact from tariffs than initially assumed.
Meanwhile, its performance by end-market was mixed. The company saw strength in its pharma and biotech operations, showing healthy sequential growth amid improving demand. However, this was offset by weakness in the academic and government sectors, as well as diagnostics and healthcare. Academic and government revenue was down mid-single digits YoY, reflecting customer hesitancy in a more uncertain environment. Meanwhile, in diagnostics and healthcare, it was mostly headwinds in China that dragged on its performance, leading to a low-single-digit decline in revenue YoY.
All in all, TMO is still navigating headwinds, but delivers healthy and accelerating growth nonetheless, driven by strong execution and pulling the levers within its own control. This was the best investors could hope for.
Moving to the bottom-line performance, TMO did clearly see an impact from U.S. tariffs, but these weren’t anywhere near as significant as previously assumed.
TMO reported a Q2 gross margin of 41.3%, down 80 bps YoY. This was driven by a 150 bps headwind from FX and tariffs, offset by 70 bps of operational cost efficiencies. Moving to costs, SG&A as a percentage of revenue was up 40 bps YoY to 16.4% and management kept heavily investing in R&D, while other costs declined slightly YoY.
As a result, TMO reported an operating income of $2.38 billion, up 1% YoY. This was driven by higher YoY revenue but a mild 40 bps YoY decline in the operating margin to 21.9%, which was the result of a lower gross margin, offset slightly by lower OpEx.
Ultimately, operating income suffered a 5% tariff headwind, equivalent to a 140-basis-point headwind to the operating margin. Notably, this was offset by 100 bps of margin improvement elsewhere, which meant the actual earnings impact was more muted than anticipated by management and Wall Street—a significant positive. Yes, we are seeing some margin weakness, but not nearly as severe as feared. The weakness we see now is more than priced in.
Anyway, this resulted in an EPS of $5.36, which beat guidance by $0.13, driven by a $0.08 lower impact from tariffs than expected and a $0.05 contribution from excellent cost management. Additionally, EPS benefited from a 1.3% lower share count YoY.
All in all, these really are excellent results, driven by very strong execution in the face of significant headwinds, both in terms of costs and demand – investors couldn’t have wished for more.
Finally, YTD FCF now totals $1.7 billion, including $645 million in CapEx, which is solid.
Management continues to efficiently deploy these cash flows as well.
With the company maintaining a healthy balance sheet, comprising $6.4 billion in cash, $35.2 billion in debt, and a 2.7x net debt-to-EBITDA ratio, it remains well-positioned to remain aggressive in M&A, which remains a strategic priority.
Earlier this year, the company entered into a definitive agreement to acquire Solventum's purification and filtration business. Following some divestitures, the business is now positioned for an accelerated regulatory clearance process, which is expected to be completed later this year.
Additionally, TMO has reached an agreement with Sanofi to acquire its sterile fill-finish site in Ridgefield, New Jersey. This acquisition will enable TMO to continue manufacturing a portfolio of therapies for Sanofi while expanding production to meet the growing capacity demand from pharma and biotech customers in the U.S.
TMO’s acquisition track record is impressive, so I don’t doubt these acquisitions will prove accretive – management seems focused on the right areas, using its cash to strengthen its position through M&A, while also returning plenty of cash to shareholders and maintaining a healthy balance sheet.
Outlook & Valuation
Moving to the outlook, it was very positive to see management raise its FY25 guidance amid a better-than-expected Q2 and a lower impact from tariffs. TMO now expects to deliver FY25 revenue of $43.6 billion to $44.2 billion, $120 million higher at the midpoint, still reflecting an expectation for YoY organic growth of 1-3%, which is unchanged from before.
More importantly, management raised its operating margin guidance to a new range of 22.5% to 22.7%, up 30 basis points at the midpoint, and increased its EPS guidance range to $22.22 to $22.84 per share, a $0.23 increase at the midpoint, which represents a solid hike.
Critical to this is the fact that U.S.-China tariffs are less significant than previously assumed following the trade deal, which is providing TMO with some bottom-line upside compared to prior estimates. Interestingly, even under this new guidance, there is upside if tariffs remain as they are right now, with management remaining cautious.
Finally, management reaffirmed its FY25 FCF estimate, with FCF to be in the range of $7 billion to $7.4 billion for the year, at a likely FCF margin of roughly 16.5%.
Honestly, this is excellent guidance, which also exceeds my prior expectations, thereby allowing both Wall Street and me to raise our estimates.
However, this wasn’t even what really drove investor optimism post earnings. The biggest sentiment driver was management’s optimism for the years ahead. You see, management believes its end markets will gradually build from the lower growth environment that it is currently navigating. As a result, management expects growth to accelerate in 2026 and 2027, with organic growth remaining in the 3-6% range.
Additionally, management is making better-than-expected progress on its cost-saving efforts, having already realized an additional $300 million in cost reductions beyond its initial guidance. This is expected to benefit the bottom line in 2026 and 2027, likely resulting in strong operating income growth in the mid-to-high single digits, driven by 50 to 70 bps of operating margin expansion annually, with room for further upside. This should propel EPS growth into the low-double digits, which is excellent.
Longer-term, management indicates its growth drivers remain in place and the industry remains incredibly compelling, which I can’t argue against - demographics are working in its favor. As the operating environment is expected to improve in the coming years, management believes its long-term scenario will continue to unfold favorably, likely enabling 7%+ organic revenue growth beyond 2027.
Most importantly, this commentary from management removes some fundamental investor concerns and allows for shares to be revalued back to the norm.
TMO’s growth prospects remain excellent!
As for my projections, I have slightly raised my FY25 estimates toward the high end of management’s current guided range, as I remain optimistic. Meanwhile, I have fine-tuned my medium-term estimates, lowering them slightly to be a bit more conservative, but these haven’t moved too much. You can find my full projections below.
Following the earnings pop earlier this week, TMO shares have revalued closer to their historical averages, moving away from the no-brainer bargain levels we saw earlier this year. TMO shares are now up approximately 11% since my early-April coverage, leading to roughly 14% multiple expansion amid relatively stable medium-term estimates.
At the same time, TMO shares remain down 9% YTD and 17% over the last 12 months, and still trade at a decent discount to their historical average multiples and to what this high-quality compounder with an impenetrable moat and solid outlook arguably deserves.
At a current share price of $475, TMO shares now trade at 21 times this year’s earnings, which represents a 13% discount to its 5-year average of just over 24 times. Now, I know, this might seem like a hefty multiple for a company growing EPS by low-double digits at best, but we shouldn’t overlook the sheer quality, durability, and strength of this business, as I explained early on – this is one of the most reliable compounders money can buy and its poised for many more decades of growth, considering it is impossible to disrupt and has secular trends working in its favor.
Buying a SWAN like this is well worth the premium.
Furthermore, we are now looking at a cash flow multiple of 21x, which also reflects an 11% discount. And when we adjust for forward growth, we end up with a PEG of just under 2x, reflecting a 15% discount. And finally, TMO shares currently pay a 0.36% dividend yield, which is 47% higher than we have seen on average.
In other words, while the deep discount might have disappeared, TMO shares still look appealing. For reference, if we award it a 22x FY27 fair value exit multiple, which I would argue is more than fair, I calculate an end-of-2027 target price of $607. From a current share price of $475, this reflects potential annualized returns of roughly 10.5%, which really isn’t too bad, especially considering I am using conservative estimates.
Therefore, I believe TMO shares, at current prices, offer decent value; however, I wouldn’t buy aggressively after last week’s pop, especially amid broader macroeconomic uncertainty. Ideally, I would like to accumulate TMO shares at a price below $455 per share, which is down 4% from current levels.
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Hello Daan,
Thank you for sharing your analysis—very clear and well-structured.
I had a question regarding the PEG ratio. You mentioned it is "just below 2x," which you find attractive. However, if we take your target multiple of 22x for FY27 and compare it with the estimated EPS growth (between 8% and 11% annually), the resulting PEG would be more in the range of 2.0x to 2.75x, depending on the starting point.
In that context, don’t you think a more conservative P/E ratio — for example, 16x — might better reflect that growth rate, especially in an environment with positive real interest rates where multiples tend to compress?
From that perspective, it would seem that the market is already pricing in a good portion of the expected FY27 growth. How do you see the potential for multiple expansion from these levels? What levers could justify it?
Best regards, and thanks in advance!