Solid 4Q for Thermo Fisher

Thermo Fisher Scientific (TMO - Analyst Report) reported adjusted earnings per share (“EPS”) of $1.36 in the fourth quarter of fiscal 2012, which surpassed the Zacks Consensus Estimate of $1.28 and the adjusted EPS of $1.19 in the year-ago period. Fiscal 2012 EPS increased 19% compared with the year-ago period to reach $4.94 and sailed past the Zacks Consensus Estimate of $4.85 as well.

Revenues increased 6% year over year to reach $3.26 billion during the quarter, higher than the Zacks Consensus Estimate of $3.12 billion, based on 4% organic growth. For the entire year, revenues increased 8% to $12.51 billion, ahead of the Zacks Consensus Estimate of $12.39 billion. Fiscal revenue growth on a pro forma basis (considering the Dionex and Phadia acquisitions were owned for the entire fiscal 2011) was 4%. Moreover, there was a 1% tailwind from acquisitions other than Phadia, negated by a 2% impact from currency translation.

Thermo Fisher reports revenues under three segments – Analytical Technologies, Specialty Diagnostics, and Laboratory Products and Services. These three segments recorded revenues of $1.11 billion (2% annualized growth), $792 million (up 12%) and $1.50 billion (up 4%), during the fourth quarter, respectively.

Gross margin expanded 49 basis points (bps) to 44.3% during the quarter. In addition, Thermo Fisher witnessed a 10.8% increase in adjusted operating income for the fourth quarter of 2012 to $625.1 million leading to an adjusted operating margin of 19.2%, up 92 bps year over year. Adjusted figures exclude amortization of acquisition-related intangible assets and restructuring costs and related tax benefits.

The company exited the fiscal with cash and cash equivalents of $851.3 million compared with $1,016.3 million at the end of Dec 2011. A strong cash balance helps the company pursue suitable acquisitions or reward its shareholders through share buybacks. During the reported quarter, the company deployed $350 million to repurchase 5.7 million shares.

Guidance

Thermo Fisher provided its fiscal 2013 guidance. The company expects adjusted EPS in the band of $5.32−$5.46 for 2013, (resulting in annualized growth rate of 8%−11%) on revenues of $12.80−$13.00 billion (2%−4%). The Zacks Consensus Estimates for EPS and revenue of $5.40 and $12.94 billion, respectively, fall within the guided range.

Recommendation

We are encouraged by Thermo Fisher’s performance in the fourth quarter with both revenues and EPS sailing past the respective Zacks Consensus Estimates. We are optimistic about the company’s acquisition spree, which includes the recent ones like One Lambda, Dionex and Phadia. These acquisitions are expected to strengthen the company’s product portfolio and provide better access to regions with strong potential. We believe that the acquisition of One Lambda, with strong operating margin, should also benefit the company and be accretive to earnings in 2013.

Over the recent past, a rumor of another acquisition by Thermo Fisher has been at play. According to a Reuters’ source, this time it is a big name, the company’s arch rival Life Technologies (LIFE - Analyst Report), which currently has a market cap of $1.11 billion.

Although we remain skeptical about the credibility of the acquisition news, we believe, the company’s strong cash position enables it to make suitable acquisitions or repurchase shares, thereby improving the bottom line further.

Thermo Fisher retains a Zacks Rank #2 (Buy). Medical devices stocks such as ResMed (RMD - Snapshot Report), and Merit Medical (MMSI - Snapshot Report), which carry a Zacks Rank #1 (Strong Buy) are also worth considering.