Thermo Fisher Beats, Guidance Raised

Zacks

Thermo Fisher Scientific (TMO) reported adjusted earnings per share (“EPS”) of $1.19 in the third quarter of fiscal 2012, surpassing the Zacks Consensus Estimate of $1.16 and the adjusted EPS of $1.07 in the year-ago period.

Revenues increased 5% year over year to reach $3.09 billion during the quarter, higher than the Zacks Consensus Estimate of $2.99 billion based on overall growth across the diverse segments. Revenue growth on a pro forma basis (considering Phadia acquisition was owned for the entire third quarter in both years) was 4%. There was a 1% tailwind from acquisitions other than Phadia negated by a 3% impact from currency translation.

Thermo Fisher reports revenues under three segments – Analytical Technologies, Specialty Diagnostics and Laboratory Products and Services. These three segments recorded revenues of $1.01 billion (1% annualized growth), $707 million (up 15%) and $1.51 billion (up 5%), during the quarter, respectively.

Gross margin expanded 68 basis points (bps) to 43.86% during the quarter. In addition, Thermo Fisher witnessed a 5% increase in adjusted operating income for the third quarter 2012 to $575.7 million leading to an adjusted operating margin of 18.7%, flat year over year. Adjusted figures exclude amortization of acquisition-related intangible assets and other acquisition-related costs, restructuring costs and related tax benefits.

The company exited the quarter with cash and cash equivalents of $832.2 million compared with $1,016.3 million at the end of December 2011. A strong cash balance helps the company to pursue suitable acquisitions or reward its shareholders through share buybacks. During the quarter, the company acquired global transplant diagnostics major One Lambda, in order to strengthen its offering of in vitro specialty diagnostics for improving patient care for $925 million in cash.

During the reported quarter, the company deployed $400 million to repurchase 7.1 million shares.

Guidance

Based on a strong third quarter performance along with completion of One Lambda acquisition and improved foreign exchange, Thermo Fisher raised its fiscal 2012 guidance. The company now expects to report revenues of $12.32−$12.40 billion (previous guidance was $12.14−$12.26 billion) reflecting annualized growth of 7%.

The outlook for adjusted EPS has also been raised to $4.81−$4.88 ($4.74−$4.84), resulting in 16−17% (14−16%) growth. The current Zacks Consensus Estimate of $4.81 for EPS is falling at the lower level of the guided range though the consensus revenue estimate of $12.26 billion is way below the company’s guidance.

Recommendation

We are encouraged by Thermo Fisher’s performance in the third quarter with both revenues and EPS sailing past the respective Zacks Consensus Estimates. We are optimistic about the company’s continuous acquisition spree which includes the recent ones like One Lambda, Dionex and Phadia, which are expected to strengthen the company’s product portfolio and provide better access to regions with strong potential.

We believe that the acquisition of One Lambda, with strong operating margin should also benefit the company and be accretive to earnings in 2013. 

The company’s strong cash position enables it to make suitable acquisitions, or repurchase shares, thereby improving the bottom line further. Moreover, after a period of unfavorable currency movement, the company heaved a sigh of relief with a slight improvement in foreign exchange during the quarter. Thermo Fisher operates in a fiercely competitive market with peers like Life Technologies (LIFE).

We currently have a Neutral recommendation on Thermo Fisher over the long term. The stock retains a Zacks #2 Rank (Buy) in the short term.

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