Thermo Fisher Ups, Guides Guardedly

Thermo Fisher Scientific (TMO - Analyst Report) reported an adjusted EPS of $1.18 in the fourth quarter of fiscal 2011, beating both the Zacks Consensus Estimate of $1.15 and earnings of 96 cents per share in the fourth quarter of 2010. For the twelve months, the adjusted EPS came in at $4.16, ahead of the Zacks Consensus Estimate of $4.13 and the previous year’s $3.46.

Revenues increased 15% year over year to reach $3.13 billion during the quarter, higher than the Zacks Consensus Estimate of $3.07 billion. Revenue growth on a pro forma basis (considering Dionex and Phadia acquisitions were owned for the entire fourth quarter in both years) was 6% with negligible impact from currency translation and another 1% tailwind from acquisitions other than Dionex and Phadia. Revenues during the fiscal grew 11% to $11.73 billion, nominally higher than the Zacks Consensus Estimate of $11.66 million.

While revenues increased 15% during the quarter, Thermo Fisher’s adjusted EPS saw a higher rate of increase (23%) driven by improvement in operating margin and a 5.7% decline in the share count, partially offset by higher net interest expenses ($50.6 million compared with $15.7 million in the year-ago quarter).

Thermo Fisher reports revenues under three segments -- Analytical Technologies, Specialty Diagnostics and Laboratory Products and Services. These three segments recorded revenues of $1.08 billion (23% annualized growth), $705 million (up 32%) and $1.48 billion (up 5%), during the quarter, respectively.

Gross margin increased 90 basis points (bps) to 43.3% during the quarter. In addition, Thermo Fisher witnessed a 100 bps increase in adjusted operating margin to 18.9% while net margin increased only 10 bps to 14.2%. 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 $1,016.3 million compared with $917.1 million at the end of December 2010. A strong cash balance helps the company pursue suitable acquisitions or reward its shareholders through share buybacks. Thermo Fisher spent $350 million to buy back 7 million shares during the quarter.

Guidance

Thermo Fisher revealed its outlook for fiscal 2012. Amidst a challenging macro-economic environment, the company expects to report revenues of $12.15−$12.35 billion, representing growth of 4−5% and adjusted EPS of $4.67−$4.82, resulting in 12−16% growth. While the current Zacks Consensus Estimate of $4.72 in EPS is within the company’s guidance, the revenue outlook for 2012 is more conservative than our expectation of $12.52 billion.

Recommendation

Players in the life science tools segment experienced a tough time over the last few quarters due to the challenging economic uncertainty especially in the government and academic markets. Thermo Fisher retains a short term Zacks #4 Rank (Sell). Challenges remain the same for Thermo Fisher’s peer Life Technologies Corporation (LIFE - Analyst Report) that is scheduled to report fourth quarter and fiscal 2011 earnings on February 7^th after the market close.

Despite impediments, new product launches along with improved margins should benefit Thermo Fisher. Besides, a strong cash position has enabled the company to look for suitable acquisitions; the most significant in recent times are Phadia and Dionex. It is encouraging to note that synergies from these two acquisitions have exceeded expectations. 

Moreover, Thermo Fisher’s expansion in high growth emerging markets led to strong double-digit performance in China, India and Brazil during the quarter. The Asia-Pacific market now accounts for 15% of total company revenues, up from 13% in 2010.

We currently have a Neutral recommendation on Thermo Fisher.

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