Thermo Fisher’s 22.9% return over the past six months has outpaced the S&P 500 by 14.4%, and its stock price has climbed to $551.55 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is now the time to buy Thermo Fisher, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Is Thermo Fisher Not Exciting?

Despite the momentum, we're sitting this one out for now. Here are three reasons you should be careful with TMO and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, Thermo Fisher’s sales grew at a mediocre 6.7% compounded annual growth rate over the last five years. This was below our standard for the healthcare sector.

2. Slow Organic Growth Suggests Waning Demand In Core Business

In addition to reported revenue, organic revenue is a useful data point for analyzing Research Tools & Consumables companies. This metric gives visibility into Thermo Fisher’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, Thermo Fisher’s organic revenue averaged 1% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations.

3. Shrinking Adjusted Operating Margin

Adjusted operating margin is a key measure of profitability. Think of it as net income (the bottom line) excluding the impact of non-recurring expenses, taxes, and interest on debt - metrics less connected to business fundamentals.

Looking at the trend in its profitability, Thermo Fisher’s adjusted operating margin decreased by 8.3 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was 22.7%.

Final Judgment

Thermo Fisher’s business quality ultimately falls short of our standards. With its shares beating the market recently, the stock trades at 23× forward P/E (or $551.55 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. Let us point you toward the most entrenched endpoint security platform on the market.

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