We think that Thermo Fisher Scientific Inc. (NYSE: TMO) is currently a better choice compared to Qualcomm Inc. (NASDAQ: QCOM). Both companies have their current P / S multiples around 6x, while TMO’s current P / EBIT is just over 23x. Do these valuations make sense? We don’t think so, and we think TMO should be valued more. While both companies have seen a sharp increase in revenue since the lockdowns were lifted, TMO has experienced much faster and consistent sales growth over the past five years than Qualcomm. TMO’s revenue grew from $ 18.3 billion in fiscal 2016 to $ 32.2 billion in fiscal 20 and currently stands at $ 39.1 billion on an LTM basis . By comparison, Qualcomm’s sales hovered around the $ 23 billion mark between FY16 and FY20, before climbing to $ 33 billion in FY21 (the fiscal year of Qualcomm ends in September).
That said, we’re getting the comparison deeper, which makes Thermo Fisher Scientific a better bet than Qualcomm, even at these ratings. Let’s step back to take a closer look at the relative valuation of the two companies by looking at detailed historical revenue growth as well as operating profit and operating margin growth, as well as financial condition. 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 Advances in Revenue Growth
Both companies managed to see strong sales growth after the pandemic, but TMO has experienced much faster and more consistent revenue growth over the years. TMO’s sales grew from $ 18.3 billion in fiscal 2016 to $ 39.1 billion on an LTM basis, while Qualcomm’s revenue grew from $ 23.6 billion during fiscal year 2016 to approximately $ 33 billion on an LTM basis.
In addition, TMO’s annual pre-Covid sales growth is 11.2%, above Qualcomm’s 1.4%, and even the growth during Covid is 26.1%, above -3, 1% of Qualcomm. However, for the most recent quarter, Qualcomm saw sales growth of over 60% year-on-year, well above TMO’s 9.5%. Even on an LTM basis, Qualcomm’s sales growth is 62.9%, more than TMO’s 37.1%.
That said, TMO’s sales growth over the years has been much more consistent than that of Qualcomm, and we believe that should be rewarded in the form of a higher valuation for TMO.
2. Qualcomm ahead of EBIT margins, but Thermo Fisher Scientific in better cash position
Qualcomm’s P / EBIT ratio is currently around 22x, slightly lower than TMO’s 23x. It’s a bit tough since Qualcomm’s EBIT LTM margins are 31.7%, higher than TMO’s 27%. Moreover, in terms of recent margin growth, Qualcomm leads the way, with the LTM margin variation from the last three years at 11.4%, more than the 7.8% of TMO.
Now, looking at the cash flow of the two companies, TMO’s debt as a percentage of equity stands at 0%, compared to Qualcomm’s 1%. However, TMO’s cash flow as a percentage of assets is much higher at 33.3%, compared to Qualcomm’s 16.3%.
3. Finally, Thermo Fisher Scientific is ahead in terms of expected yields
Using P / S as a basis, due to the high fluctuations in P / E and P / EBIT, we believe TMO is the best choice. TMO’s LTM revenue of $ 39 billion is expected to grow at a CAGR of 11.3% according to our estimates, bringing three-year revenue to $ 54 billion. Assuming TMO’s P / S ratio returns to an average of around 5.6x, that means market cap would hit $ 302 billion, up 19% over three years.
By comparison, given historical trends, we would expect Qualcomm’s sales to grow more slowly at a CAGR of just 1.6%, bringing revenue in three years to just over $ 34 billion. However, considering Qualcomm’s P / S to correct historical averages by around 5x, we estimate a market cap of $ 175 billion for QCOM, well below its current level.
The net of everything
TMO’s revenue is higher than Qualcomm’s, and the former has also experienced 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 grown more steadily than Qualcomm. For this reason, we believe TMO deserves a higher P / S and P / EBIT multiple than Qualcomm, and we believe this will soon be reflected in the relative valuations of companies. As such, we believe Thermo Fisher Scientific stock is currently a better bet compared to Qualcomm stock.
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|Return of the S&P 500||6%||27%||113%|
|Trefis MS Portfolio Return||2%||48%||297%|
 Monthly cumulative and annual cumulative at 12/31/2021
 Total cumulative returns since 2017