Thermo Fisher Beats, Ups Guidance

Zacks

Thermo Fisher Scientific (TMO) reported earnings per share (EPS) of 75 cents in the first quarter of fiscal 2012 compared with 64 cents in the year-ago quarter. After taking into account certain one-time items, adjusted EPS came in at $1.17, above the Zacks Consensus Estimate of $1.11 and the adjusted EPS of 92 cents in the year-ago period.

Revenues increased 14% year over year to reach $3.1 billion during the quarter, higher than the Zacks Consensus Estimate of $2.98 billion based on strong demand for analytical instruments and strength in the biopharma services business. Revenue growth on a pro forma basis (considering Dionex and Phadia acquisitions were owned for the entire first quarter in both years) was 4%. There was a 1% tailwind from acquisitions other than Dionex and Phadia negated by a 1% 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 (21% annualized growth), $729 million (up 27%) and $1.51 billion (up 4%), during the quarter, respectively.

Gross margin expanded 100 basis points (bps) to 43.4% during the quarter. In addition, Thermo Fisher witnessed a 90 bps increase in adjusted operating margin to 18.5% while net margin increased only 70 bps to 14%. Adjusted figures exclude amortization of acquisition-related intangible assets and other acquisition-related costs, restructuring costs and related tax benefits.

While revenues increased 14% during the quarter, Thermo Fisher’s adjusted EPS saw a higher rate of increase (27%) driven by improvement in operating margin and a 6.2% decline in the share count, partially offset by higher net interest expenses ($57.7 million compared with $27.8 million in the year-ago quarter).

The company exited the quarter with cash and cash equivalents of $788.3 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. Thermo Fisher spent $300 million to buy back 6 million shares during the quarter and initiated a quarterly dividend of 13 cents per share.

Guidance

Thermo Fisher raised its outlook for fiscal 2012 primarily due to favorable currency movement. The company now expects to report revenues of $12.27−$12.43 billion (previous guidance of $12.15−$12.35 billion), representing growth of 5−6% (4−5%) and adjusted EPS of $4.71−$4.83 ($4.67−$4.82), resulting in 13−16% (12−16%) growth. The current Zacks Consensus Estimate of $4.76 in EPS with revenues of $12.312 billion is within the company’s guidance.

Recommendation

We are encouraged by Thermo Fisher’s performance in the first quarter with both revenues and EPS sailing past the respective Zacks Consensus Estimates. This is all the more commendable as players in the life science tools segment experienced difficult times over the last few quarters due to the challenging economic uncertainty especially in the government and academic markets.

Bracing several headwinds, players in the life science tools segment have resorted to cost control, new product launches and a re-focus on emerging markets to drive growth. These strategies are yielding palpable results as seen in the first-quarter numbers from Thermo Fisher and its peer Life Technologies Corporation (LIFE). Life Technologies released upbeat numbers yesterday after market close.

Besides, a strong cash position has enabled the company to look for suitable acquisitions; the most significant in recent times are Phadia and Dionex. Thermo Fisher’s expansion in high growth emerging markets led to strong double-digit performance in China, India and Brazil during the quarter. The stock retains a Zacks #2 Rank (Buy) in the short term.

Although the current economic environment has stabilized to some extent, we prefer to hold a cautious view for the time being. We currently have a Neutral recommendation on Thermo Fisher over the long term.

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