Thermo Fisher Scientific vs. Danaher: Which Diagnostics & Research Stock is a Better Buy?

Advanced research breakthroughs and integration of advanced technologies for predicting and analyzing the development and progression of diseases have allowed the diagnostics and research industry to grow significantly over the past few years. Rising investments in the industry make its long-term prospects bright. The clinical diagnostics market is expected to grow at a 6.1% CAGR to reach $93.85 billion by 2026. 

Thermo Fisher Scientific Inc. (TMO) and Danaher Corporation (DHR) are two prominent companies in the global diagnostics and research sector. TMO offers life sciences solutions, analytical instruments, specialty diagnostics, and laboratory products and services. It serves pharmaceutical and biotech companies, hospitals and clinical diagnostic labs, universities, research institutions, and government agencies. In comparison, DHR designs, manufactures, and markets professional, medical, industrial, and commercial products and services in test and measurement, environmental, life sciences, dental, and industrial technologies.

While DHR has risen 11% over the past year, TMO is up about 10%. Which of these stocks is a better pick now? Let’s find out.

Latest Developments

On February 3, 2022, TMO launched the Thermo Scientific Nicolet RaptIR Fourier Transform Infrared (FTIR) spectroscopy Microscope, enabling users to quickly collect high-spatial-resolution visual and infrared data with minimal time and effort. Moreover, this next-generation microscope integrates with 64-bit Thermo Scientific OMNIC Paradigm workflow software, offering a new user interface, simplifying materials science research, and increasing user flexibility. This should witness high demand in the coming months.

On August 30, 2021, DHR completed the acquisition of Aldevron, a manufacturer of high-quality plasmid DNA, mRNA, and proteins, serving biotechnology and pharmaceutical customers across research, clinical and commercial applications, for $9.60 billion in cash. Aldevron will operate as a standalone company and brand within DHR’s Life Sciences segment. This acquisition will expand DHR’s capabilities into the important field of genomic medicine and bring more life-saving therapies and vaccines to market faster.

Recent Financial Results

For its fiscal 2021 fourth quarter ended December 31, 2021, TMO’s revenue increased 21.7% year-over-year to $39.21 billion. The company’s operating income came in at $3.16 billion, representing a 10% decline from the year-ago period. TMO’s adjusted net income came in at $2.60 billion, indicating an 8.3% year-over-year decline. Its adjusted EPS decreased 7.8% year-over-year at $6.54. The company had $4.48 billion in cash and cash equivalents as of December 31, 2021.

DHR’s sales for its fiscal 2021 fourth quarter ended December 31, 2021, increased 20.5% year-over-year to $8.15 billion. The company’s gross profit came in at $4.94 billion, representing a 25% year-over-year improvement. Its operating profit came in at $2.15 billion, indicating a 34.5% rise from the prior-year period. DHR’s net income came in at $1.75 billion for the quarter, representing a 45.6% rise from the year-ago period. Its adjusted EPS came in at $2.69, up 29.3% from the prior-year period. As of December 31, 2021, the company had $2.59 billion in cash and equivalents.

Past and Expected Financial Performance

TMO’s revenue and EBITDA have increased at CAGRs of 17.2% and 27.8%, respectively, over the past three years. The company’s levered free cash flow grew at 19.3% CAGR over the past three years.

Analysts expect TMO’s EPS to decline 10.3% year-over-year in fiscal 2022, ended December 31, 2022, and rise 7.9% in fiscal 2023. Its revenue is expected to grow 7.5% year-over-year in fiscal 2022 and 5.7% in fiscal 2023. The company’s EPS is expected to grow at a rate of 10.8% per annum over the next five years.

In comparison, DHR’s revenue and EBITDA have grown at CAGRs of 20% and 31.2%, respectively, over the past three years. The company’s levered free cash flow has grown at 25% CAGR over the past three years.

DHR’s EPS is expected to rise 4.1% year-over-year in fiscal 2022 ended December 31, 2022, and 5% in fiscal 2023. Its revenue is expected to grow 5.3% year-over-year in fiscal 2022 and 4.8% in fiscal 2023. Analysts expect the company’s EPS to grow at a 16.9% rate per annum over the next five years.

Valuation

In terms of non-GAAP forward PEG, TMO is currently trading at 1.84x, 35.3% higher than DHR’s 1.36x. In terms of forward EV/EBITDA, DHR’s 19.84x compares with TMO’s 21.31x.

Profitability

TMO’s trailing-12-month revenue is almost 1.3 times DHR’s. However, DHR is more profitable, with a 61% gross profit margin versus TMO’s 51.6%.

Furthermore, DHR’s net income margin and levered free cash flow of 21.8% and 17.8% compare favorably with TMO’s 19.7% and 14%, respectively.

POWR Ratings

While DHR has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, TMO has an overall C grade, equating to a Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

Both TMO and DHR have a C grade for Value, which is in sync with its slightly higher-than-industry valuations. TMO has a 24.71x non-GAAP forward P/E, 15.8% higher than the 21.33x industry average. DHR’s 25.69x non-GAAP forward P/E is 20.5% higher than the industry average of 21.33x.

While DHR has a C grade for Quality, TMO has a D. TMO’s weaker quality grade is in sync with its lower-than-industry profitability ratios. TMO has a 51.6% trailing-12-month gross profit margin, 7.4% lower than the industry average of 55.7%.

Of the 167 stocks in the D-rated Medical - Devices & Equipment industry, DHR is ranked #37.

TMO is ranked #28 of 57 stocks in the F-rated Medical - Diagnostics/Research industry.

Beyond what we have stated above, our POWR Ratings system has also rated TMO and DHR for Growth, Sentiment, Momentum, and Stability. Get all DHR ratings here. Also, click here to see the additional POWR Ratings for TMO.

The Winner

Surging demand and investments in the diagnostics and research industry should help TMO and DHR grow. However, higher profitability and relatively lower valuation make DHR a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Medical - Devices & Equipment industry, and here for those in the Medical - Diagnostics/Research industry.

TMO shares were unchanged in after-hours trading Wednesday. Year-to-date, TMO has declined -17.52%, versus a -5.97% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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