Thermo Fisher Remains Neutral

We reiterate our Neutral recommendation on Thermo Fisher Scientific (TMO - Analyst Report) with a target price of $55.00.

Thermo Fisher Scientific reported a strong first quarter with both revenues and earnings surpassing the Zacks Consensus Estimates. The company also raised its outlook for fiscal 2012 primarily on the basis of favorable currency movement.

The company has expanded its margins over the last few quarters on the back of successful implementation of several initiatives. These include the adoption of Practical Process Improvement (“PPI”) and PPI-Lean projects, continued tight cost control on discretionary spending, global sourcing and infrastructure optimization. The latter helped reduce footprint and expand low-cost region manufacturing in China, Mexico, Puerto Rico and Eastern Europe. PPI and PPI-Lean initiatives are expected to result in $80 million of savings in 2012, while approximately $20 million will be realized from reduced manufacturing footprint.

Besides, Thermo Fisher’s past acquisitions have added complementary technologies, expanded its presence in high-growth markets, and generated cost and revenue synergies, thereby creating shareholder value. Significant recent acquisitions include Dionex and Phadia. Dionex has brought in liquid and ion chromatography while Phadia is a leading player in allergy and autoimmunity diagnostics.

Thermo Fisher also has strong international operations. In fact, the emerging markets generated robust growth in the most recent quarter with China growing over 20%. The company expects to garner 25% of total revenues from the high-growth Asia-Pacific and emerging markets by 2016 from 19% in 2011 (10% in 2006). We are encouraged by the company’s strategy of expanding in the markets of Korea, Taiwan, Brazil and Russia, replicating the success it has experienced in China and India. The company is also looking at expanding its manufacturing footprint to serve local markets and capitalize on demand for specialty diagnostics.

Effective capital deployment has been one of the key contributors toward EPS growth. The company repurchased 7 million shares for $350 million during the first quarter of 2012 and was left with $650 million of authorization through November 2012. Based on a strong cash balance, the company has been strengthening its portfolio through suitable acquisitions.

However, the company has faced the brunt of weak government and academic markets. Many countries in Europe, grappling with debt burden, would look to trim their budgets. Moreover, the company is exposed to fluctuations in foreign exchange and a tough competitive landscape with the presence of players such as Life Technologies (LIFE - Analyst Report) and Qiagen (QGEN - Snapshot Report) among others.

Our recommendation is backed by a Zacks #3 Rank (Hold) in the short term.