Investors Still Waiting For A Pull Back In Thermo Fisher Scientific Inc. (NYSE:TMO)

With a price-to-earnings (or "P/E") ratio of 36.7x Thermo Fisher Scientific Inc. (NYSE:TMO) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 17x and even P/E's lower than 9x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Recent times haven't been advantageous for Thermo Fisher Scientific as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Thermo Fisher Scientific

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Is There Enough Growth For Thermo Fisher Scientific?

The only time you'd be truly comfortable seeing a P/E as steep as Thermo Fisher Scientific's is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 12%. As a result, earnings from three years ago have also fallen 2.3% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 13% per year over the next three years. That's shaping up to be materially higher than the 10% per annum growth forecast for the broader market.

With this information, we can see why Thermo Fisher Scientific is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Thermo Fisher Scientific's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Thermo Fisher Scientific that you need to be mindful of.

If these risks are making you reconsider your opinion on Thermo Fisher Scientific, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.