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We have reiterated our Neutral recommendation on Thermo Fisher Scientific (TMO - Analyst Report) with a target price of $65.00.

Thermo Fisher reported a strong third quarter with both adjusted earnings per share (EPS) of $1.19 and revenues of $3.09 billion sailing past the Zacks Consensus Estimates. The company raised its 2012 outlook and now expects to report revenues of $12.32−$12.40 billion (previous guidance of $12.14−$12.26 billion) and EPS of $4.81−$4.88 ($4.74−$4.84) resulting in 16−17% (14−16%) growth to reflect the strong third quarter performance, along with the completion of the One Lambda acquisition and a slightly improved foreign exchange.

With the successful implementation of several initiatives, the company has expanded its margins over the last few quarters. The successful initiatives include benefits from global sourcing, the optimization of infrastructure which may lead to site consolidation or reduction in footprints, ramp up in low-cost region (LCR) manufacturing as well as the adoption of Practical Process Improvement (PPI) program to reduce waste.

Further, due to the uncertain economic environment, the company is working on additional restructuring actions. Recently, it initiated restructuring actions worth another $75 million with majority of the benefits expected in 2013. Overall, the company realized $16 million of benefit from its restructuring actions in the third quarter. We are encouraged by the company’s progress with respect to reducing 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 increasing shareholders’ value. The recent being the newly completed acquisition of One Lambda, which is likely to strengthen its foothold in the immensely potent transplant diagnostics market.

The One Lambda acquisition followed the successful closure of the Doe & Ingalls deal, 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 7.1 million shares for $400 million during the reported quarter, taking the year-to-date share buyback to 15.1 million (for $800 million). It also distributed another $95 million in dividends in this quarter. 

However, the company has faced the brunt of weak government and academic markets. Many countries in Europe, grappling with debt burden, will likely curtail their budgets based on the weak macroeconomic environment.  Moreover, the company is exposed to fluctuations in foreign exchange and a tough competitive landscape with the presence of players such as Life Technologies among others.

Our recommendation is backed by a Zacks #2 Rank (Buy) in the short term.

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