PerkinElmer to Outperform

We upgrade our recommendation on PerkinElmer ( PKI - Analyst Report ) to Outperform based on its third quarter results. Earnings per share of 45 cents surpassed the Zacks Consensus Estimate by a penny.

Net income from continuing operations was approximately $29 million in the quarter (or 25 cents per share), up 3.5% year over year. Net income was $29.6 million, down 19.1% on a year-over-year basis.

Revenues improved 12.5% year over year to $509.6 million in the reported quarter and surpassed the Zacks Consensus Estimate of $505 million. Revenues grew 6% year over year on an organic basis after adjustment for acquisitions which contributed 8% to the growth in revenues in the quarter and a 3% drop accounting for negative impact of foreign currency fluctuation.

Human Health segment revenues were $257.2 million, up 24.5% (up 10% on an organic basis) year over year. Revenues from the Environmental Health segment amounted to $252.4 million in the quarter, up 2.5% (up 3% on an organic basis).

PerkinElmer has established itself as a market leader, particularly in the genetic screening segment, and holds one of top two market share positions in several important subsets of the life sciences technology and genetic screening businesses.

The company continues to execute well across its product lines aided by rebounding markets and cost containment efforts. PerkinElmer’s transfer of select manufacturing to China has expanded its operating margins. The company has increased its productivity and improved product mix in favor of higher value added products, resulting in higher operating margins.

PerkinElmer, however, operates in a highly competitive industry characterized by rapid technological change and evolving industry standards. As a result, the company would have to make large investments in R&D in order to retain a competitive pipeline. PerkinElmer competes with Thermo Fisher Scientific ( TMO - Analyst Report ) among others.

PerkinElmer's exposure to poor end market visibility might result in a relatively unattractive risk-reward trade-off for the stock. However, the company’s operations, both sales and manufacturing, are diversified on a geographic basis. It has emerged as a higher-growth, higher-margin company vis-à-vis its peers. The stock carries a short-term Zacks #2 Rank (Buy).