Shares of Thermo Fisher Scientific (TMO 0.66%) recently bounced a few percentage points higher. Investors were responding to fourth-quarter earnings and new forward-looking estimates that exceeded expectations.
Thermo Fisher stock soared 182% during the three-year period that ended on Dec. 31, 2021, but 2022 was a difficult year. The stock price has fallen about 12% from the peak it reached over a year ago.
Its stock price is down, but Thermo Fisher is a much larger business now than it was at the end of 2021. Let's look under the hood to see if it's a smart buy at recent prices.
The bad news about Thermo Fisher Scientific
A sinking bottom line is one of the first things investors notice when considering an investment in Thermo Fisher Scientific. Trailing-12-month (TTM) earnings peaked above $20 per share in 2021, but the company earned just $17.63 per share in 2022.
TMO EPS Diluted (TTM) data by YCharts
Thermo Fisher's bottom line looks like a disaster because demand for COVID-related testing just isn't what it used to be. The company reported a whopping $9.2 billion in COVID-19 response revenue in 2021. This figure fell to an annualized run rate of just $1.5 billion, based on fourth-quarter results.
On May 11, the U.S. government's emergency declarations related to the COVID-19 pandemic will officially end. This means insurers can start asking us to pay for COVID-19 tests and testing-related services out of our own pockets. Without the government's emergency declarations in place, I'll be surprised if Thermo Fisher has enough COVID-19 response revenue in the second half of 2023 to bother reporting it separately.
Right now, Thermo Fisher stock trades at 25.5 times forward-looking earnings estimates. That's a high multiple for a company earning less now than it was a year ago. If its bottom line doesn't start moving in the right direction soon, the stock could fall hard.
Reasons to buy Thermo Fisher stock now
When it comes to serving science, Thermo Fisher is the world leader. Whether your laboratory needs a new test tube rack or electron microscope, odds are pretty good that you're going to order both from Thermo Fisher. Its position as the go-to provider of laboratory equipment means it benefits from economies of scale that smaller competitors can only dream of.
Profit margins contracted from 2021 through the present, but don't let that fool you into thinking the company's been poorly managed.
TMO Profit Margin data by YCharts
Zooming out to a longer time line quickly shows us that profit margins have trended higher over the past decade, albeit not in a straight line. This isn't shaping up to be a banner year, but investors can reasonably expect a return to growth on the bottom line. In its latest earnings report, management told investors to expect $23.70 per share in adjusted earnings for 2023, which is around 2% more than the company recorded in 2022.
The end of COVID-19 emergency declarations in the U.S. could be more than offset by the abrupt end of China's zero-COVID policy last December. China is Thermo Fisher's second-largest end market, and lockdowns that kept laboratories from running at full capacity were a significant constraint.
Shareholder friendly
Despite plowing $1.5 billion into research and development last year, Thermo Fisher reported an impressive $6.9 billion in free cash flow. These are profits the company can use to pay down debt, buy back shares, or distribute as a dividend.
At recent prices, Thermo Fisher's dividend offers a minuscule 0.2% yield. This isn't much, but investors will be glad to know the company has doubled its payout since it began a series of consecutive annual raises in 2018.
Thermo Fisher isn't a stock to buy for passive income, but the fact that it distributes profits at all is kind of a big deal. From 1973 through 2021, stocks in the S&P 500 index that paid and grew their dividends delivered a 10.7% average annual return. Stocks that didn't pay a dividend rose just 4.8% on average, according to Hartford Funds and Ned Davis Research.
You might not want to buy Thermo Fisher stock solely for its dividend. But plenty of opportunities to grow its footprint in all science-related industries, tempered by a commitment to distribute profits, makes it a great dividend stock to buy right now.
