We think that Thermo Fisher Scientific Inc. (NYSE:TMO) currently is a better pick compared to Qualcomm Inc. (NASDAQ:QCOM). Both companies have their current P/S multiples around 6x, while TMO’s current P/EBIT stands marginally higher at 23x. Do these valuations make sense? We don’t think so, and we believe TMO should be valued higher. While both companies have seen a strong rise in revenues since the lockdowns started being lifted, TMO has seen much more rapid and consistent sales growth over the past five fiscal years than Qualcomm. TMO’s revenues have risen from $18.3 billion in FY ’16 to $32.2 billion in FY ’20 and currently stand at a strong $39.1 billion on an LTM basis. In comparison, Qualcomm’s sales hovered around the $23 billion mark between FY ’16 and FY ’20, before surging to $33 billion in FY ’21 (Qualcomm’s fiscal year ends in September).
Having said that, we dive deeper into the comparison, which makes Thermo Fisher Scientific a better bet than Qualcomm, even at these valuations. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at detailed historical revenue growth as well as operating income and operating margin growth, along with the financial position. Our dashboard Qualcomm vs Thermo Fisher Scientific: Similar Income, But Thermo Fisher Scientific Is A Better Bet has more details on this. Parts of the analysis are summarized below.
1. Thermo Fisher Scientific Ahead On Revenue Growth
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Both companies managed to see strong sales growth post the pandemic, but TMO has witnessed much faster and more consistent revenue growth over the years. TMO’s sales have jumped from $18.3 billion in FY ’16 to $39.1 billion on an LTM basis, while Qualcomm’s revenues have risen from $23.6 billion in FY ’16 to around $33 billion on an LTM basis.
Further, TMO’s pre-Covid annual sales growth stands at 11.2%, higher than Qualcomm’s 1.4%, and even growth during Covid stands at 26.1%, higher than Qualcomm’s -3.1%. However, for the most recent quarter, Qualcomm saw more than 60% sales growth YoY, much more than TMO’s 9.5%. Even on an LTM basis, Qualcomm’s sales growth stands at 62.9%, more than TMO’s 37.1%.
Having said that, TMO’s sales growth over the years has been much more consistent compared to Qualcomm, and we believe this should be rewarded in the form of a higher valuation for TMO.
2. Qualcomm Ahead On EBIT Margins, But Thermo Fisher Scientific In A Better Cash Position
Qualcomm’s P/EBIT ratio stands at around 22x currently, marginally lower than TMO’s 23x. This is a little harsh since Qualcomm’s LTM EBIT margins stand at 31.7%, higher than TMO’s 27%. Further, in terms of recent margin growth, Qualcomm stands ahead, with LTM vs last three FY margin change at 11.4%, more than TMO’s 7.8%.
Now, looking at both companies’ cash position, TMO’s debt as a % of equity stands at 0%, vs Qualcomm’s 1%. However, TMO’s cash as a % of assets stands much higher at 33.3%, compared to Qualcomm’s 16.3%.
3. Finally, Thermo Fisher Scientific Is Ahead In Terms Of Expected Returns
Using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe TMO is the better choice. TMO’s LTM revenues of $39 billion are expected to rise at a CAGR of 11.3% as per our estimates, taking revenue numbers three years out to as high as $54 billion. Assuming TMO’s P/S ratio to pull back to an average of about 5.6x, this means that the market cap would rise to $302 billion, an upside of 19% over three years.
In comparison, given historical trends, we expect Qualcomm’s sales to rise slower at a CAGR of just 1.6%, taking revenue in three years to a little over $34 billion. However, considering the P/S for Qualcomm to correct to historical averages of around 5x, we estimate a market cap of $175 billion for QCOM, much lower than the level it is at today.
The Net of It All
TMO’s revenues are larger than that of Qualcomm’s, and the former has also seen faster and more consistent revenue growth over the years, combined with strong EBIT margins and a better cash position. Additionally, our comparison of the post-Covid recovery above, shows that TMO has seen steadier growth than Qualcomm. Due to this, we believe that TMO deserves a higher P/S and P/EBIT multiple compared to Qualcomm, and we believe that this will reflect in the companies’ relative valuations soon. As such, we believe that Thermo Fisher Scientific stock is currently a better bet compared to Qualcomm stock.
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|S&P 500 Return||6%||27%||113%|
|Trefis MS Portfolio Return||2%||48%||297%|
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 Cumulative total returns since 2017