We reiterate our Neutral recommendation on
Thermo Fisher Scientific
) with a target price of $55.00.
Thermo Fisher Scientific reported a strong first quarter with both
revenues and earnings surpassing the Zacks Consensus Estimates. The
company also raised its outlook for fiscal 2012 primarily on the
basis of favorable currency movement.
The company has expanded its margins over the last few quarters on
the back of successful implementation of several initiatives. These
include the adoption of Practical Process Improvement ("PPI") and
PPI-Lean projects, continued tight cost control on discretionary
spending, global sourcing and infrastructure optimization. The
latter helped reduce footprint and expand low-cost region
manufacturing in China, Mexico, Puerto Rico and Eastern Europe. PPI
and PPI-Lean initiatives are expected to result in $80 million of
savings in 2012, while approximately $20 million will be realized
from reduced manufacturing footprint.
Besides, Thermo Fisher's past acquisitions have added complementary
technologies, expanded its presence in high-growth markets, and
generated cost and revenue synergies, thereby creating shareholder
value. Significant recent acquisitions include Dionex and Phadia.
Dionex has brought in liquid and ion chromatography while Phadia is
a leading player in allergy and autoimmunity diagnostics.
Thermo Fisher also has strong international operations. In fact,
the emerging markets generated robust growth in the most recent
quarter with China growing over 20%. The company expects to garner
25% of total revenues from the high-growth Asia-Pacific and
emerging markets by 2016 from 19% in 2011 (10% in 2006). We are
encouraged by the company's strategy of expanding in the markets of
Korea, Taiwan, Brazil and Russia, replicating the success it has
experienced in China and India. The company is also looking at
expanding its manufacturing footprint to serve local markets and
capitalize on demand for specialty diagnostics.
Effective capital deployment has been one of the key contributors
toward EPS growth. The company repurchased 7 million shares for
$350 million during the first quarter of 2012 and was left with
$650 million of authorization through November 2012. Based on a
strong cash balance, the company has been strengthening its
portfolio through suitable acquisitions.
However, the company has faced the brunt of weak government and
academic markets. Many countries in Europe, grappling with debt
burden, would look to trim their budgets. Moreover, the
company is exposed to fluctuations in foreign exchange and a tough
competitive landscape with the presence of players such as
) among others.
Our recommendation is backed by a Zacks #3 Rank (Hold) in the
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