Earnings Scorecard: Thermo Fisher - Analyst Blog

Subsequent to the announcement of Thermo Fisher Scientific’s (TMO) second quarter fiscal 2010 results on July 27, 2010, revision of estimates among analysts depict a downward trend.

Second Quarter Highlights

Thermo Fisher reported an EPS of 57 cents in the second quarter of 2010 compared to 49 cents in the year-ago period. However, after adjusting for certain one-time items, the EPS was 84 cents, meeting the Zacks Consensus Estimate and 14% higher than the second quarter of 2009.

The company reported revenues of $2.65 billion, up 7% compared to the year-ago quarter. Acquisitions had a positive impact of 3% on revenues while unfavorable foreign exchange (forex) movement brought down revenues by 1%. Reported revenues narrowly missed the Zacks Consensus Estimate of $2.67 billion.

The company maintained its adjusted EPS guidance of $3.40-$3.50, representing a growth of 11% - 15% over 2009. However, unfavorable forex movement forced Thermo Fisher to lower its revenue guidance to $10.60-$10.75 billion, down from the previous guidance of $10.65-$10.80 billion. This represents a growth of 5%-6% over 2009.

For a full coverage on the earnings, read: TMO Meets, Cuts Revenue Guidance

Following the release of second quarter results, estimate revision trends among the analysts depict a negative bias for the company’s earnings in the forthcoming period. Over the past 30 days, 9 of 13 analysts covering the stock have made downward revisions for the third quarter without any opposite movement. Besides, estimates for fiscal 2010 and fiscal 2011 were lowered by 7 and 6 analysts, respectively. In comparison, the number of upward revisions has been quite modest with only 2 and 1 analyst raising the estimates for 2010 and 2011, respectively. The same negative trend continued in the past 7 days also. Estimates for the third quarter were lowered by 4 analysts with 1 doing the reverse.

Although Thermo Fisher posted a 5% organic revenue growth during the second quarter, this is much lower than 13% recorded by the company during the first quarter of 2010.
The second half of 2010 will be difficult for Thermo Fisher due to the presence of certain issues. The company had four more calendar days during the first quarter of 2010 (compared to 2009) which had a positive impact of 4-5% on its revenues. As a result, there will be a comparable opposite impact in the fourth quarter.

Additional headwinds consist of the termination of the Biosite contract (effective July 1, 2010), which is likely to hit second half revenues by approximately $55 million. The flu season was strong in 2009 compared to expectation of a normal flu this year ($20 million impact). Both of these items will impact the third quarter more than the fourth.

Thermo Fisher derives substantial revenues from international operations exposing it to the foreign exchange (forex) movement. We note that the expectation of unfavorable forex movement forced the company to lower its revenue guidance for fiscal 2010.
 
The end-market scenario for Thermo Fisher does not seem to be quite attractive. Capital spending continues to remain constrained in the biopharma market, a trend the company expects to continue in the third quarter as well. The healthcare market remained soft due to a decline in doctor and hospital visits along with weak flu season. However, Thermo Fisher’s clinical diagnostics business, especially drugs of abuse testing and specialty assays recorded strong growth during the quarter.
 
We are pleased to note that Thermo Fisher witnessed acceleration in global stimulus programs during the quarter. Additional funds, released by the US, had a positive impact of $15 million during the quarter ($60 million in the first quarter, primarily from Japan stimulus funding). The company has received $125 million as stimulus since last year and is well within the range of $100 to $200 million of stimulus sales in 2010. It also expects more US stimulus related revenues in the second half. The industrial market witnessed some improvement (due to easier comps) especially for the company’s portable analyzers business.

Magnitude of Estimate Revisions

The magnitude of estimate revisions for the forthcoming quarters has been modest. In the past 30 days, estimate for the third quarter has dropped by 1 cent while estimate for the fourth quarter has gone up by 1 cent. Moreover, estimates for fiscal years 2010 and 2011 have reduced by 1 cent to $3.46 and 2 cents to $3.86, respectively, in the past 30 days.
Our Recommendation

The second half of 2010 seems to be challenging for Thermo Fisher due to certain issues discussed above. As a result, the Zacks #4 Rank (sell) is based on the near term headwinds of the company.
 
However, we believe with a gradual improvement in the economic scenario along with Thermo Fisher’s focus on potential markets and other strategies should drive its top line in the forthcoming period. Moreover, the company’s strong cash position should assist in making suitable acquisitions, reduce debt burden or repurchase shares. Given the long term potential of the company, we are Neutral on the stock.
 
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