⁠Dimitry Nakhla | Babylon Capital®
A sober valuation analysis on $TMO 🧘🏽‍♂️

•NTM P/E Ratio: 23.68x
•5-Year Mean: 24.92x

•NTM FCF Yield: 4.09%
•5-Year Mean: 3.59%

As you can see, $TMO appears to be trading near fair value

Going forward, investors can receive ~5% MORE in earnings per share & ~14% MORE in FCF per share 🧠***

Before we get into valuation, let’s take a look at why $TMO is a great business

BALANCE SHEET🆗
•Cash & Short-Term Inv: $6.65B
•Long-Term Debt: $31.20B

$TMO has a good balance sheet (acquisitions a big growth driver), a A- S&P Credit Rating & 6x FFO Interest Coverage

RETURN ON CAPITAL✅*
•2019: 8.3%
•2020: 13.4%
•2021: 12.8%
•2022: 10.3%
•2023: 8.7%
•LTM: 8.6%

*lower ROIC due to acquisition strategy

RETURN ON EQUITY✅
•2019: 12.9%
•2020: 19.9%
•2021: 20.5%
•2022: 16.4%
•2023: 13.1%
•LTM: 12.9%

$TMO has strong return metrics, highlighting the financial efficiency of the business

REVENUES✅
•2013: $13.09B
•2023: $42.86B
•CAGR: 12.59%

FREE CASH FLOW✅
•2013: $1.73B
•2023: $6.93B
•CAGR: 14.88%

NORMALIZED EPS✅
•2013: $5.42
•2023: $21.55
•CAGR: 14.80%

SHARE BUYBACKS❌
•2013 Shares Outstanding: 365.80M
•LTM Shares Outstanding: 384.25M

MARGINS✅
•LTM Gross Margins: 40.7%
•LTM Operating Margins: 17.4%
•LTM Net Income Margins: 14.5%

***NOW TO VALUATION 🧠

As stated above, investors can expect to receive ~5% MORE in EPS & ~14% MORE in FCF per share

Using Benjamin Graham’s 2G rule of thumb, $TMO has to grow earnings at an 11.84% CAGR over the next several years to justify its valuation

Today, analysts anticipate 2025 - 2026 EPS growth over the next few years to be less than the (11.84%) required growth rate:

2024E: $21.70 (0.7% YoY) *FY Dec

2025E: $23.58 (8.7% YoY)
2026E: $26.37 (11.8% YoY)

$TMO has an excellent track record of meeting analyst estimates ~2 years out, so let’s assume $TMO ends 2026 with $26.37 in EPS & see its CAGR potential assuming different multiples

27x P/E: $711.99💵 … ~14.0% CAGR

26x P/E: $685.62💵 … ~12.0% CAGR

25x P/E: $659.25💵 … ~10.0% CAGR

24x P/E: $632.88💵 … ~7.9% CAGR

As you can see, $TMO appears to have attractive return potential IF we assume >26x earnings (a multiple above its 5-year mean & multiple that may be slightly demanding given its growth rate

However, $TMO is an excellent business with a wide moat & will benefit from future ongoing sector demand

Yet, those buying $TMO today at $541💵 are buying it for a fair price, with little margin of safety

I’d be more interested in $TMO closer to $500💵 (8% below today’s price) where I can reasonably expect ~11% to ~12% CAGR while assuming a 23x - 24x end multiple, ensuring a comfortable margin of safety

#stocks #investing
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𝐃𝐈𝐒𝐂𝐋𝐎𝐒𝐔𝐑𝐄‼️: 𝐓𝐡𝐢𝐬 𝐢𝐬 𝐍𝐎𝐓 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐀𝐝𝐯𝐢𝐜𝐞. 𝐁𝐚𝐛𝐲𝐥𝐨𝐧 𝐂𝐚𝐩𝐢𝐭𝐚𝐥® 𝐚𝐧𝐝 𝐢𝐭𝐬 𝐫𝐞𝐩𝐫𝐞𝐬𝐞𝐧𝐭𝐚𝐭𝐢𝐯𝐞𝐬 𝐦𝐚𝐲 𝐡𝐚𝐯𝐞 𝐩𝐨𝐬𝐢𝐭𝐢𝐨𝐧𝐬 𝐢𝐧 𝐭𝐡𝐞 𝐬𝐞𝐜𝐮𝐫𝐢𝐭𝐢𝐞𝐬 𝐝𝐢𝐬𝐜𝐮𝐬𝐬𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭.

𝐓𝐡𝐞 𝐢𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧 𝐜𝐨𝐧𝐭𝐚𝐢𝐧𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭 𝐢𝐬 𝐢𝐧𝐭𝐞𝐧𝐝𝐞𝐝 𝐟𝐨𝐫 𝐢𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧𝐚𝐥 𝐩𝐮𝐫𝐩𝐨𝐬𝐞𝐬 𝐨𝐧𝐥𝐲 𝐚𝐧𝐝 𝐬𝐡𝐨𝐮𝐥𝐝 𝐧𝐨𝐭 𝐛𝐞 𝐜𝐨𝐧𝐬𝐭𝐫𝐮𝐞𝐝 𝐚𝐬 𝐢𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐚𝐝𝐯𝐢𝐜𝐞 𝐭𝐨 𝐦𝐞𝐞𝐭 𝐭𝐡𝐞 𝐬𝐩𝐞𝐜𝐢𝐟𝐢𝐜 𝐧𝐞𝐞𝐝𝐬 𝐨𝐟 𝐚𝐧𝐲 𝐢𝐧𝐝𝐢𝐯𝐢𝐝𝐮𝐚𝐥 𝐨𝐫 𝐬𝐢𝐭𝐮𝐚𝐭𝐢𝐨𝐧. 𝐏𝐚𝐬𝐭 𝐩𝐞𝐫𝐟𝐨𝐫𝐦𝐚𝐧𝐜𝐞 𝐢𝐬 𝐧𝐨 𝐠𝐮𝐚𝐫𝐚𝐧𝐭𝐞𝐞 𝐨𝐟 𝐟𝐮𝐭𝐮𝐫𝐞 𝐫𝐞𝐬𝐮𝐥𝐭𝐬.

𝐈𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧 𝐜𝐨𝐧𝐭𝐚𝐢𝐧𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭 𝐡𝐚𝐬 𝐛𝐞𝐞𝐧 𝐨𝐛𝐭𝐚𝐢𝐧𝐞𝐝 𝐟𝐫𝐨𝐦 𝐬𝐨𝐮𝐫𝐜𝐞𝐬 𝐛𝐞𝐥𝐢𝐞𝐯𝐞𝐝 𝐭𝐨 𝐛𝐞 𝐫𝐞𝐥𝐢𝐚𝐛𝐥𝐞, 𝐛𝐮𝐭 𝐢𝐬 𝐧𝐨𝐭 𝐠𝐮𝐚𝐫𝐚𝐧𝐭𝐞𝐞𝐝 𝐚𝐬 𝐭𝐨 𝐜𝐨𝐦𝐩𝐥𝐞𝐭𝐞𝐧𝐞𝐬𝐬 𝐨𝐫 𝐚𝐜𝐜𝐮𝐫𝐚𝐜𝐲.
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⁠Quiver Quantitative
RT @InsiderRadar: $SMLR has risen over 6% this morning, and is now up 8% since an insider purchase was reported yesterday https://t.co/JbaCFvvUdr

🚨 JUST IN: New Insider Purchase

A director of $SMLR has reported the purchase of ~$1.9M of the company's stock.

The stock rose over 35% between when the trade was made (on 11/7) and when it was reported.

This is only the first insider purchase at the company in over a year. - Insider Radar
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⁠Stock Analysis Compilation
Hedge funds' best ideas #18 is in your inbox 🔥
(link below)

Includes links to the Q3 letters from Alta Fox / Aoris / Aristotle / Choice Equities CM / Clearbridge / Conestoga / Donville Kent / Greenlight / Greystone CM / Guinness GI / Harding Loevner / Massif Capital / Middle Coast Investing / Munro / Oakmark / Third Point / Tidefall Capital / Wedgewood Partners / White Brook Capital
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⁠Investing visuals
Spotify $SPOT delivery a strong Q3 and really turned on the cash printer lately. Here's everything you need to know👇 https://t.co/RPVPDm7ee3
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⁠Hidden Value Gems
Should be an exciting reading on some of Buffett’s early investments. We are all keen to learn the method of generating 50% returns annually!

Thank you for writing this book, @brettgardner_10 🙌

cc @Investbythebook https://t.co/p2yFdlWHY0
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⁠Investing visuals
Palantir $PLTR seems like an unstoppable rocket ship, hitting new all-time-highs📈

The market’s now betting on 30% FCF growth for the next 10 years. Let’s see how it all plays out 🤷‍♂️ https://t.co/y4aR3IJhN7
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⁠Stock Analysis Compilation
Munro on Vertiv $VRT US

Thesis: Vertiv is set to double its earnings as AI-driven demand for advanced data centers surges, making it a critical partner for tech giants and hyperscalers worldwide.

(Extract from their Q3 letter) https://t.co/aFlYvY147V
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⁠Investing visuals
Spotify $SPOT 🎵 vs. Netflix $NFLX 🍿
Whose your favorite?
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⁠Startup Archive
The advice from Paul Graham that helped Airbnb find product/market fit

“Paul Graham gave us a series of advice that probably changed our business for ever… He basically said: ‘It’s better to have 100 customers that love you than a million customers that just sort of like you.’”

Airbnb founder Brian Chesky continues:

“If you have 100 people who absolutely love your product, they’ll tell 100 people, and they’ll tell 100 people, and this thing will grow virally. In fact, almost all movements in history have grown this way as well—there are deeply passionate followers and they grow it, and they’re customer advocates.”

He contrasts this to the general wisdom in Silicon Valley of: “I need to build this app. It needs have this viral coefficient. I need to get millions of people to use it. And they need to like it enough to share it.”

Brian argues that this is the wrong way to think about building a great product. And once they stopped worrying about millions of people, it was totally freeing.

At this moment, the Airbnb founding team decided to get 100 people to love them, they would do things that don’t scale:

“Getting 100 people to love you means you need to meet them and understand their problem. We would fly during Y Combinator from Mountain View to New York and we would go door to door and meet with everyone of our hosts and literally live with them.”

This was a huge inflection point for the company.

“And once you have 100 people, you just focus on figuring out how to scale that. It’s a totally different intellectual problem to scale something 100 people love than to figure out [how to get 1 million people who like you to love you]. And that was the turning point for us.”

Video source: @GreylockVC (2015)
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