Thermo Fisher (TMO) Stays Neutral

We recently reiterated our Neutral recommendation on Thermo Fisher Scientific (TMO) with a target price of $52.0.

Thermo Fisher reported first quarter fiscal 2010 earnings per share (EPS) of $0.84, beating the Zacks Consensus Estimate of $0.75 and the year-ago earnings of $0.62. Revenues increased 19% year over year to a record $2.68 billion fueled by acquisitions and a favorable foreign currency translation.

Thermo Fisher’s revenues and adjusted EPS have grown at a CAGR of 12% and 28%, respectively, over a period of four years, 2004–2008. However, the 2009 recession has bruised the company badly leading to a reduction in both revenues and EPS. With the economy gradually taking the path of recovery and based on several strategic initiatives, Thermo Fisher’s fiscal 2010 guidance reflects a positive future. The company expects its 2010 revenues and adjusted EPS in the range of $10.65–$10.80 billion (5-7% growth) and $3.40–$3.50 (11-15% growth), respectively.

We are pleased to note that Thermo Fisher expects its adjusted operating margin to improve by 50-80 basis points (bps) to 17.5%–17.8% in 2010. The company aims to achieve this through rationalization and restructuring of its facilities, low cost region (LCR) manufacturing, lean manufacturing and global sourcing. The company has achieved about 20% in cost savings by transferring manufacturing operations to LCRs of China, Mexico and Eastern Europe.

Moreover, in order to improve its product portfolio, Thermo Fisher plans to increase its R&D investments by $30 million in 2010. We believe based on a solid groundwork, the company will be able to maintain its momentum in the forthcoming period.

Thermo Fisher has strong international operations and derived 39% of its revenues in fiscal 2009 from the international market. While Asia contributed 11% of the revenues in 2009, the company is increasing its focus on emerging markets especially China, which has immense potential.

However, we remain concerned about Thermo Fisher’s exposure to foreign exchange movement. Moreover, the company’s business depends heavily on general economic conditions. Turbulence in the market could negatively impact the company’s sales driven by financial constraints and customers deferring their buying decision.

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