Earnings preview: Thermo Fisher

Zacks

Thermo Fisher Scientific (TMO) is scheduled to report its third quarter, fiscal 2012 results before the market opens on Wednesday, October 24, 2012. The company is expected to earn $1.16 (representing an increase of 8.29% from the year-ago quarter’s $1.07) on revenues of $2.99 billion, according to the Zacks Consensus Estimate.

Barring the third quarter of fiscal 2011, Thermo Fisher has surpassed expectations in the last three quarters with a four-quarter positive surprise of 4.40%. This means that the company has surpassed the Zacks Consensus Estimate by this magnitude over the last four quarters. Based on this favorable trend, there is a high probability that the company will exceed estimates in the upcoming quarter.

Previous Quarter Highlights

Thermo Fisher reported adjusted earnings per share (EPS) of $1.22 in the second quarter of fiscal 2012, surpassing the Zacks Consensus Estimate of $1.16 and the adjusted EPS of 99 cents in the year-ago period.

Revenues increased 9% year over year to reach $3.10 billion during the quarter, nominally higher than the Zacks Consensus Estimate of $3.05 billion based on overall growth across all segments. Revenue growth on a pro forma basis (considering that the Dionex and Phadia acquisitions were owned for the entire second quarter in both years) was 1%. There was 1% tailwind from acquisitions other than Dionex and Phadia, negated by a 3% impact from currency translation.

Agreement of Analysts

Revisions in estimates for the third quarter have been mixed over the past month. Of the total 15 estimates for the quarter, one has been revised upward, while only 2 moved in the opposite direction over the last 30 days. In the past week, only one analyst revised the estimate and moved in the downward direction.

However, for the entire fiscal, the estimate revision trend confirms that the majority of analysts are in agreement about a strong third quarter earnings at Thermo Fisher. Out of 17 estimates, there were 3 upward revisions over the last 30 days without any revision in the opposite direction. Over the last 7 days, only one estimate revision has been made in the upward direction.

Amid a tough macroeconomic environment which affected many Thermo Fisher’s peers, the analysts are encouraged by the company’s performance in the last reported quarter which surpassed the estimates. Although, they make a cautious stand on the company due to ongoing headwinds in the academic and government end markets, they are encouraged by the company’s highly diversified nature and believe that it should benefit from its current focus on food safety, water quality, climate change and molecular research.

Meanwhile, the firms are optimistic about the company’s continuous acquisition spree which includes the recent ones like One Lambda, Dionex and Phadia, which will strengthen the company’s product portfolio and provide better access to regions with strong potential. They believe that the acquisition of One Lambda, with strong operating margin should also benefit the company and be accretive to earnings in 2013.  Moreover, according to the analysts, Thermo Fisher has a strong presence in the emerging markets than its peers and China could prove to be significant for the company’s growth.

However, concern remains about lower organic growth expectations over the next two years as its exposure to China is still quite low, not so encouraging ROIC because of continued M&A activities and the ongoing economic uncertainty.

Thermo Fisher provided a detailed outlook for fiscal 2012. The company expects to report revenues of $12.14−$12.26 billion (previous guidance of $12.27−$12.43 billion) in fiscal 2012 reflecting the impact of divestiture of laboratory workstations, unfavorable currency, partially offset by an additional revenue from Doe & Ingalls acquisition. However, the outlook for adjusted EPS was raised to $4.74−$4.84 ($4.71−$4.83), resulting in 14−16% (13−16%) growth on the back of the previously mentioned factors as well as increased stock repurchase authorization.

In spite of the current uncertainty in the global governmental funding, most of the analysts are encouraged with the outlook and are confident that Thermo Fisher would be able to meet its guidance based on its strong fundamentals and business strategies.

Magnitude of Estimate Revisions

There have been no estimate revisions for the third quarter over the past 60 days. However, estimates for the quarter have gone down by a penny over the past 3 months. Moreover, estimates for fiscal 2012 have increased by a penny and 3 cents to $4.81 over the past 30 and 90 days, respectively. The current Zacks Consensus Estimate for 2012 is $4.81, reflecting year-over-year growth of 15.65%.

Recommendation

We are encouraged with the strong performance of Thermo Fisher in the recent quarters.  The company has been recording improved operating margin over the recent past, reflecting the initiatives to keep the cost structure lean. It is also banking on Practical Process Improvement (:PPI) and PPI-Lean projects. The huge potential in the emerging markets led the company to focus on these regions, which paid off with their robust performances in the recent quarters.

The company’s strong cash position enables it to make suitable acquisitions, or repurchase shares, thereby improving the bottom line further. However, several factors, including unfavorable foreign exchange movement, deferrals in buying decisions of customers could negatively impact the company’s sales in the upcoming quarter that led it to lower the revenue outlook for 2012. Thermo Fisher operates in a fiercely competetive market with peers like Life Technologies (LIFE). We are currently ‘Neutral’ on the stock over the long term.

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