Q4 Earnings Beat by Thermo Fisher, Strong Outlook

Zacks Equity Research

Thermo Fisher Scientific (TMO) reported adjusted earnings per share (EPS) of $1.43 in the fourth quarter of fiscal 2013. The figure remained ahead of the Zacks Consensus Estimate by 5 cents and surpassed the year-ago adjusted EPS by 5.2%. For the full year, adjusted earnings came in at $5.42, up 10% year over year and ahead of the Zacks Consensus Estimate of $5.36.

On a reported basis, fourth-quarter EPS of 92 cents showed a year-over-year decline of 11.5% due to certain favorable impact related to a tax rate change in a foreign jurisdiction in the year-ago period. However, 2013 reported EPS grew by 8.4% to $3.48.

Revenues increased 6% year over year to $3.47 billion during the quarter, higher than the Zacks Consensus Estimate of $3.30 billion. The entire increase was owing to organic growth as the effects of acquisitions and currency translation were insignificant. Full year 2013 revenues were $13.09 billion, up 5% year over year, and surpassed the Zacks Consensus Estimate of $12.92 billion.

Thermo Fisher reports revenues under three segments – Analytical Technologies, Specialty Diagnostics and Laboratory Products and Services. These three segments recorded revenues of $1.14 billion (6% annualized growth), $833 million (up 5%) and $1.64 billion (up 8%), during the fourth quarter, respectively.

Gross margin of 44.3% during the fourth quarter remained nearly in line with the year-ago quarter. Thermo Fisher witnessed an increase of 6.7% in adjusted operating income to $667 million.

Adjusted operating margin came in at 19.2%, up a mere 6 basis points (bps) year over year. Adjusted figures exclude amortization of acquisition-related intangible assets and restructuring costs and related tax benefits.

The company exited the year 2013 with cash and cash equivalents of $5.84 billion compared with $805.6 million at the end of 2012. Operating cash flow for the year was $2.01 billion versus the year-ago figure of $2.03 billion. A strong cash balance helps the company pursue suitable acquisitions or reward its shareholders through share buybacks.

Guidance

Thermo Fisher initiated its 2014 guidance. The company expects to report adjusted EPS for the year in the range of $6.70 to $6.90 implying annualized growth of 24% to 27%. The Zacks Consensus Estimate of $5.95 remains well below the guidance range.

The company also expects 2014 revenues in the range of $16.63 billion to $16.83 billion that reflects growth of 27% to 29% from 2013. This expectation outshines the current Zacks Consensus Estimate of $13.4 billion.

Notably this strong 2014 guidance takes into consideration the impact of integration Life Technologies (LIFE) business. The impending acquisition of Life Technologies is expected to close by early 2014. This also includes the impact of several recent divestitures at Thermo Fisher.

Recommendation

Earlier this month, subsequent to the European Commission’s (EC) conditional approval of the impending $13.6 billion (or $76 per share) acquisition of Life Technologies, Thermo Fisher also received the Chinese regulatory nod, subject to certain conditions.

These conditions include divestment of TMO’s cell culture and gene modulation business, price cuts on two of the company’s products (SSP kits and SDS-PAGE protein standards) that are sold in China, and sale of Thermo Fisher’s 51% stake in China's Lanzhou National Hyclone Bio-engineering Co Ltd.

To fulfil many of the conditions imposed by these regulatory authorities, in January this year, Thermo Fisher inked a deal to divest 3 of its business divisions to GE Healthcare, a unit of General Electric Co. (GE).

As per management at Thermo Fisher, the acquisition supports its three-pronged growth strategy of technological innovation, a unique customer value proposition and expansion in emerging markets.

In addition, substantial expansion in the Asia-Pacific market, mainly China, is on the cards for the company. Given the huge potential in the region and high growth rate in China, Thermo Fisher is likely to exceed its goal of garnering 25% revenues from the high-growth Asia-Pacific region and emerging markets by 2016.

Thermo Fisher currently carries a Zacks Rank #2 (Buy). Another well-performing medical device stock is Affymetrix Inc. (AFFX) carrying a Zacks Rank #1 (Strong Buy).

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