We have reaffirmed our Neutral recommendation on Thermo Fisher Scientific (TMO) following its fourth-quarter 2011 results. The company reported a strong fourth quarter with both adjusted EPS and revenues sailing past the Zacks Consensus Estimates.
Thermo Fisher has been recording margin expansion over the past few quarters on the back of Practical Process Improvement (“PPI”) and PPI-Lean projects, continued tight cost control on discretionary spending and infrastructure optimization that includes reduced footprint and expanded low-cost region manufacturing (China, Mexico and Eastern Europe).
The company reported a 100 basis point (bps) improvement in adjusted operating margin during the reported quarter to 18.9%. This was driven by improved organic growth, strong contribution from cost-productivity actions and accretion from the recent acquisitions.
In response to more challenging market conditions, Thermo Fisher undertook incremental restructuring actions and discretionary cost control during the third quarter that resulted in $9 million of benefit in the quarter, over and above the normal productivity efforts driven through PPI and PPI Lean projects.
Thermo Fisher’s strong international operations are now yielding encouraging results. Maintaining its previous trend, emerging markets generated strong double-digit growth in the fourth quarter with both China and India growing over 20%. The high-growth Asia-Pacific markets now account for 15% of total company revenues, up from 13% in 2010. The company is also experiencing significant growth in Brazil. We believe that Thermo Fisher’s expanding presence in the emerging markets will continue to be an important growth driver for 2012.
Effective capital deployment has been one of the key contributors toward EPS growth. Thermo Fisher exited fiscal 2011 with $1,016.3 million in cash and cash equivalents compared with $917.1 million at the end of fiscal 2010. The company repurchased 7 million shares for $350 million during the reported quarter (24.5 million shares for $1.3 billion during 2011) and was left with $650 million of authorization through November 2012. As a result of this continuous buyback program the outstanding share count at the end of the reported quarter stood at $376 million, down 5.7% from the year-ago period, thus boosting the bottom line.
The company is up against increasing headwinds in the government and academic markets. The situation in Europe might put academic budgets under the scanner in most European nations. Other players in this niche like Life Technologies (LIFE) and Illumina (ILMN) among others are facing a similar crisis.
Given the difficult times ahead, the company’s guidance is even more conservative than our expectation. The company, however, believes that the end markets would be consistent with 2011 levels. We expect growth to moderate if the economic situation worsens.
Our recommendation is backed by a Zacks #3 Rank (Hold) in the short term.
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