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Will Thermo Fisher (TMO) Pull a Surprise in Q1 Earnings?

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MA-based medical instruments manufacturer, Thermo Fisher Scientific, Inc. (TMO - Free Report) is scheduled to report first-quarter 2017 results before the opening bell on Apr 26. Last quarter, the company reported a positive earnings surprise of 1.69%. In the trailing four quarters, it posted an average beat of 2.42%. Let’s see how things are shaping up prior to this announcement.

Factors at Play

We remain encouraged by the company’s focus to boost growth through the implementation of strategies and strengthening of its product offerings. These initiatives are likely to help it post solid results in the first quarter.

The company already spent $750 million in research and development in 2016. Some of its recently introduced products worth mentioning include Q Exactive instruments for BioPharma and applied markets, which extended the capabilities of Orbitrap Mass Spec platform; Integrion HPIC system in Chromatography; TSX high-performance refrigerators and freezers in installed base of lab equipment. It also introduced new targeted assays for cancer research that run on Ion Torrent Next-Generation Sequencing instruments; new tests for autoimmune disease and drugs of abuse; and new Clariom Pico assays for more effective biomarker discovery. We expect all these innovations to significantly contribute to the company’s top line in the first quarter.

The company’s focus on expanding capabilities in the fast-growing Asia-Pacific and emerging markets should also lead to encouraging results. In 2016, standout contributors were China, India and South Korea. With strategic investments to support key customer applications, Thermo Fisher expects to maintain this bullish momentum in 2017.

The growth is likely to be in applied markets such as environmental and food safeties as well as life science. This apart, the company is currently betting on some key-focus areas with enormous opportunities. These are advancing precision medicine from mass spectrometry to targeted gene sequencing and structural biology. 

The recent acquisition of FEI is the highlight of the to-be-reported quarter. Thermo Fisher also expects to realize total synergies of approximately $80 million by the end of the three years following the deal closure, with about $55 million of cost synergies and roughly $25 million of adjusted operating income benefits from revenue-related synergies. This should get reflected from the first quarter itself.

However, we are apprehensive about Thermo Fisher citing foreign exchange to the tune of $300 million on 2017 revenues (an impact of 1.5%) and 20 cents on adjusted EPS (around 2.5%). Given one less selling day in the first quarter, Thermo Fisher expects slightly lower than average growth.

This apart, unfavorable macroeconomic condition continues to weigh heavily on Thermo Fisher's stock. Also competitive headwind continues to pose a threat on the stock's value.

Earnings Whispers

Our proven model does not conclusively show that Thermo Fisher is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Thermo Fisher’s Earnings ESP is -0.49%, since the Most Accurate estimate of $2.02 is below the Zacks Consensus Estimate of $2.03. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Thermo Fisher has a Zacks Rank #3 which increases the predictive power of ESP. However, a negative ESP makes surprise prediction difficult.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies you may consider as our model shows that they have the right combination of elements to post an earnings beat in the upcoming quarter:

Becton, Dickinson and Company (BDX - Free Report) has an Earnings ESP of +0.45% and a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here.

Humana Inc. (HUM - Free Report) has an Earnings ESP of +2.06% and a Zacks Rank #2.

Hill-Rom Holdings, Inc. (HRC - Free Report) has an Earnings ESP of +1.27% and a Zacks Rank #2.

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