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Thermo Fisher Scientific, Inc. (TMO - Analyst Report) reported its first-quarter 2014 financial results,  accounting for the inclusion of Life Technologies which was added on Feb 4 and excluding earlier announced divestures (as of March 22, 2014), related to the acquisition.

Adjusted earnings per share (EPS) in the reported quarter came in at $1.53. The figure remained well ahead of the Zacks Consensus Estimate of $1.40 and surpassed the year-ago adjusted EPS number by 11.7%. On a reported basis, first-quarter EPS of $1.36 showed a year-over-year improvement of 46.2% largely due to gains as a result of the divestitures.

Revenues increased 22% year over year to $3.90 billion during the quarter, higher than the Zacks Consensus Estimate of $3.72 billion. The increase was owing to 2% organic growth and 20% increase in revenues due to acquisition. The effect of currency translation was insignificant.

With the acquisition of Life Technologies, Thermo Fisher has begun operating in four business segments viz. Life Sciences Solutions Segment (it includes most of the Life Technologies businesses and the remaining Thermo Fisher Biosciences businesses), Analytical Instruments Segment, Specialty Diagnostics Segment, and Laboratory Products and Services Segment.      

These four segments recorded revenues of $836 million (383.2% annualized growth), $770 million (up 4.1%), $814 million (up 1%) and $1.59 billion (up 2%), during the first quarter, respectively.

Gross margin of 43.9% during the first quarter was up 22 basis points (bps) year over year. However, Thermo Fisher witnessed a 3.5% decline in adjusted operating income to $579.2 million.

Adjusted operating margin came in at 14.8%, a contraction of huge 398 bps year over year. Adjusted figures exclude amortization of acquisition-related intangible assets and restructuring costs and related tax benefits.

The company exited the year 2013 with cash and cash equivalents and short-term investment of $1.52 billion compared with $5.83 billion at the end of 2012. Operating cash flow for the quarter was $101.2 million versus the year-ago figure of $298.3 million. A strong cash balance helps the company pursue suitable acquisitions or reward its shareholders through share buybacks.

Guidance

Taking into consideration the Life Technologies acquisition and related divestitures, Thermo Fisher raised its fiscal 2014 guidance. The company now expects to report adjusted EPS for the year in the range of $6.80 to $6.95 (implying annualized growth of 25% to 28%) from earlier announced range of $6.70 to $6.90 (24% to 27%). The Zacks Consensus Estimate of $6.84 remains within the guidance range.

The company also expects 2014 revenues in the range of $16.84 to $17.00 billion (annualized growth of 29% to 30%) compared with the earlier range of $16.63 billion to $16.83 billion (growth of 27% to 29% from 2013). This expectation outshines the current Zacks Consensus Estimate of $16.77 billion.

Our Recommendation

As expected, earlier in February, Thermo Fisher completed the mega $13.6 billion takeover of Life Technologies Corporation. This remains as the biggest ever deal for Thermo Fisher which will inevitably strengthen the company’s global foothold and commercial reach.

From the financial perspective, earlier the company projected that the buyout should be immediately accretive to Thermo Fisher’s adjusted earnings by 90 cents to $1.00 within the first full year of the takeover. Further, the acquisition should create significant cost and revenue synergies for the company, with expected adjusted operating income synergies of $85 million in the first year.

As per management at Thermo Fisher, the acquisition supports its three-pronged growth strategy of technological innovation, a unique customer value proposition and expansion in emerging markets.

Further, to fulfill many of the conditions imposed by the regulatory authorities, in January this year, Thermo Fisher inked a deal to divest 3 of its business divisions to GE Healthcare, a unit of General Electric Co. (GE - Analyst Report). Accordingly in March, GE Healthcare, completed the acquisition of Thermo Fishers gene modulation, HyClone cell culture and magnetic beads businesses for about $1.06 billion.  

In addition, substantial expansion in the Asia-Pacific market, mainly China, is on the cards for the company. Given the huge potential in the region and high growth rate in China, Thermo Fisher is likely to exceed its goal of garnering 25% revenues from the high-growth Asia-Pacific region and emerging markets by 2016.

Thermo Fisher currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader healthcare sector that warrant a look are Enzymotec Ltd. (ENZY - Snapshot Report) and Myriad Genetics Inc. (MYGN - Analyst Report), carrying a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on TMO
Read the Full Research Report on ENZY
Read the Full Research Report on MYGN
Read the Full Research Report on GE


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