Thermo Fisher Scientific stock (NYSE: TMO) currently trades at $518 per share, about 5% lower than the level seen in early June 2022, just before the Fed started increasing rates, compared to 18% gains for the S&P 500 during this period. This underperformance of TMO stock can partly be attributed to declining sales of its Life Sciences segment due to lower COVID-19-related demand. Also, investors still have concerns about a potential recession despite a steady decline in the inflation rate in response to the Fed’s aggressive rate hike plan.
We note that TMO stock has had a Sharpe Ratio of 0.9 since early 2017, higher than 0.6 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.
Returning to the pre-inflation shock level of about $667 means that TMO stock will have to gain nearly 30% from here, and we don’t think this will materialize anytime soon. That said, there is upside potential from its current levels. Thermo Fisher Scientific
TMO
Our detailed analysis of Thermo Fisher Scientific’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.
2022 Inflation Shock
Timeline of Inflation Shock So Far:
- 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
- Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
- April 2021: Inflation rates cross 4% and increase rapidly.
- Early 2022: Energy and food prices spike due to Russian invasion of Ukraine. Fed begins its rate hike process.
- June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
- July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
- Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses.
In contrast, here’s how TMO stock and the broader market performed during the 2007/2008 crisis.
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in S&P 500 index.
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08).
- 3/1/2009: Approximate bottoming out of S&P 500 index.
- 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008).
- EW and S&P 500 Performance During 2007-08 Crisis.
TMO And S&P500 Performance During 2007-08 Financial Crisis
TMO stock saw a 40% decline from $60 in August 2008 (pre-crisis peak for TMO) to $36 in March 2009 (as the markets bottomed out). It surged post the 2008 crisis to levels of around $48 in early 2010, rising about 32% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.
TMO Fundamentals Over Recent Years
Thermo Fisher Scientific’s revenue rose from $25.5 billion in 2019 to $44.9 billion in 2022. Thermo Fisher Scientific manufactures analytical laboratory instruments used in various tests, and the pandemic led to an increase in demand for these instruments. Its sales growth is buoyed by continued market share gains for its instruments. Thermo Fisher Scientific’s sales were also bolstered by its Laboratory Products & Biopharma Services segment, which saw a substantial 51% y-o-y growth in 2022 due to its December 2021 acquisition of PPD
PPD
Does TMO Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?
Thermo Fisher Scientific’s total debt increased from $18 billion in 2019 to $35 billion in 2022, while its cash increased from around $2 billion to $9 billion. The company also garnered $9 billion in cash flows from operations in 2022. Given its cash cushion, TMO appears to be in a good position to service its near-term debt obligations.
Conclusion
With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe TMO stock has the potential for gains once fears of a potential recession are allayed. That said, falling Life Sciences sales and high debt levels remain risk factors for realizing these gains.
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