Thermo Fisher Stays Neutral

We reiterate our Neutral recommendation on Thermo Fisher Scientific (TMO - Analyst Report) with a target price of $59.00.

Thermo Fisher reported a strong second quarter with both adjusted EPS of $1.22 and revenues of $3.10 billion sailing past the Zacks Consensus Estimates. The company revised its 2012 outlook and now expects to report revenues of $12.14−$12.26 billion (previous guidance of $12.27−$12.43 billion) to reflect the divestiture of laboratory workstations business, unfavorable currency, partially offset by additional revenue from the Doe & Ingalls acquisition

However, the outlook for adjusted EPS has been raised to $4.74−$4.84 ($4.71−$4.83), resulting in 14−16% (13−16%) growth. Apart from the above mentioned factors, increased stock repurchase authorization led the company to raise its EPS outlook.

With the successful implementation of several initiatives, the company has expanded its margins over the last few quarters. These include the adoption of Practical Process Improvement (“PPI”) and PPI-Lean projects, continued tight cost control on discretionary spending, and global sourcing.

Further, the company’s strategy to optimize infrastructure 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.

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. The recent being the proposed acquisition of One Lambda that would strengthen its foothold in the transplant diagnostics market, which offers immense growth potential.

This came on the heels of the acquisition of Doe & Ingalls, a channel for specialty production chemicals and provider of customized supply-chain services to life sciences and microelectronics industries.

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).

Effective capital deployment has been one of the key contributors toward EPS growth. The company repurchased 2 million shares for $100 million during the quarter taking the share buyback to $400 million in the first half of the fiscal year. With $250 remaining at the end of the second quarter and an incremental buyback authorization of $500 million, the company is left with $750 million of authorization through the year end.

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) among others.

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