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Thermo Fisher Scientific Inc. (NYSE:TMO) closed yesterday at $295.55, which left some investors asking whether the high earnings potential can still be justified at this price. Let’s look into this by assessing TMO’s expected growth over the next few years.
Has the TMO train has slowed down?
According to the analysts covering the company, the following few years should bring about good growth prospects for Thermo Fisher Scientific. Expectations from 16 analysts are certainly positive with earnings forecasted to rise significantly from today’s level of $7.905 to $11.063 over the next three years. This results in an annual growth rate of 14%, on average, which indicates a solid future in the near term.
Is TMO’s share price justifiable by its earnings growth?
Thermo Fisher Scientific is trading at price-to-earnings (PE) ratio of 37.39x, this tells us the stock is overvalued compared to the US market average ratio of 17.73x , and undervalued based on its latest annual earnings update compared to the Life Sciences average of 38.97x .
Thermo Fisher Scientific’s price-to-earnings ratio stands at 37.39x, which is low, relative to the industry average. This already suggests that the stock could be undervalued. But, seeing as Thermo Fisher Scientific is perceived as a high-growth stock, we must also account for its earnings growth, which is captured in the PEG ratio. A PE ratio of 37.39x and expected year-on-year earnings growth of 14% give Thermo Fisher Scientific a quite high PEG ratio of 2.63x. So, when we include the growth factor in our analysis, Thermo Fisher Scientific appears overvalued , based on the fundamentals.
What this means for you:
TMO’s current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you’re a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
- Financial Health: Are TMO’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Past Track Record: Has TMO been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of TMO’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.