2 Mega-Cap Stocks to Consider Adding to Your Portfolio
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The stock market has been battered this week. World indices declined by more than 1.5% on Monday, on concerns about China’s most indebted property developer, Evergrande Group. With its enormous debt of $300 billion, Evergrande’s looming default could cause a contagion that might spread beyond China.
In the meantime, these two mega-cap stocks, Thermo Fisher Scientific Inc. (TMO) and Cisco Systems Inc. (CSCO) may offer investors a safe haven. Both companies have outperformed the S&P 500 during this downturn and should continue to do so in the medium to long-term.
Below, I analyze these two mega-cap stocks and highlight reasons why you should consider adding them to your portfolio.
Thermo Fisher Scientific Inc. (TMO)
TMO is the world leading provider of scientific instrumentation, reagents and consumables, as well as software services. The company develops, manufactures, and sells a range of products, through its industry-leading brands that include Thermo Scientific, Applied Biosystems, Invitrogen, Fisher Scientific, and Unity Lab Services. TMO’s mission is to enable customers to make the world healthier, cleaner, and safer. The company is also engaged in accelerating life sciences research, solving complex analytical challenges, improving patient diagnostics and therapies, or increasing productivity in laboratories.
Since the beginning of the year, TMO surged 28.9% year-to-date, outperforming modestly its benchmark, the Health Care Select Sector SPDR Fund (XLV), which climbed 16.4% since the beginning of the year.
In terms of financials, the company is expected to raise yearly net sales by only 1.9% to $36.7b in 2021, compared to double-digit growth of 12% in 2021 to $36.08b. In addition, the market consensus anticipated a decline of TMO’s bottom-line, down 3.8% year-on-year to $6.9b in 2022, which should bring some selling pressure on the company’s stock price.
At its latest investor day, TMO announced that it expects revenue of $40.3b next year, up from $35.9b it expects in 2021, which is significantly higher than revenue modeled by Wall Street analysts that stand at $36.2b in 2022.
TMO’s net sales should decline by 10.4% in the next quarter, according to the consensus of analysts, resulting in a decline of the company’s net income by 19.8% quarter-on-quarter to $1.46b. In spite of this decline, TMO’s income still provides a comfortable net margin of 17.6%.
Furthermore, the company’s balance sheet has deteriorated in 2021, as net debt jumped 34.5% year-on-year to $15.3b. However, TMO’s debt should plunge in 2022, down 38% to $9.5b, representing a healthy leverage ratio of only 0.93x.
The company announced in April its plans to buy PPD Inc. (PPD), a leading clinical research organization, for $17.4 billion, which should add $1.50 to its adjusted EPS in the first 12 months after the deal closed, according to TMO’s estimates.
With its deteriorating financials in the coming year, the stock is expensive, with a 2022e EV/EBITDA of 23.9x and a 2022e P/E ratio of 34.8x. Despite the expensive valuation, long-term investors should feel confident adding this stock to their portfolio.
Cisco Systems Inc. (CSCO)
CSCO is the worldwide leader in technology that powers the Internet. The company develops, manufactures and sells networking hardware, software, telecommunications equipment and other high-technology services and products.
CSCO’s shares advanced healthily year-to-date, up 24.3% and outperforming slightly the Communication Services Select Sector SPDR Fund (XLC), up 21% since the beginning of the year.
The fundamentals of the company have been improving consistently over the past years and analysts are expecting a moderate expansion of CSCO’s yearly net sales, up 6.2% in 2022 to $52.89b. In terms of net income, the company should accelerate its growth, up 13.1% to $11.9b in 2022, representing a net margin of 22.6%.
In more recent news, the company confirmed its plans to return at least half of its free cash flow to its shareholders, which should contribute to bringing additional tailwinds on the company’s stock price.
The company’s balance sheet is healthy, enabling the company to maintain its growing dividend and sustain a potentially prolonged downward cycle. Moreover, net cash increased consistently in the past years, establishing at $18.26b in 2022, up 40.6% year on year.
Take away
Shares of TMO and CSCO have surged in 2021 and both companies have outperformed their respective benchmarks. These two stocks are leading their respective industries and should continue to outperform in the long term.
