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Thermo Fisher Scientific, Inc. (TMO): New Analyst Report from Zacks Equity Research - Zacks Equity Research Report

Posted
2/3/2014 7:00:00 AM
By: Zacks.com
Referenced Stocks:TMO;SD

Summary:
Thermo Fisher kicked off the year 2014 with a solid performance. The company posted a better-than-expected first quarter with adjusted EPS of $1.53 and revenues of $3.90 billion, both ahead of the Zacks Consensus Estimate of $1.40 and $3.72 billion. The results also sailed past the year-ago numbers. As expected, in February, the company completed the acquisition of Life Technologies. The buyout of Life Technologies is expected to complement Thermo Fisher's portfolio of analytical technologies and specialty diagnostics. However, in a challenging market environment, a mere 2% organic growth remains a matter of concern. Besides, economic uncertainties and currency headwind continue to act as major dampeners. We are Neutral' on the stock.

Overview:

Headquartered in Waltham, Massachusetts, Thermo Fisher Scientific Inc. (TMO) is a scientific instrument maker and a world leader in serving science. Thermo Fisher was incorporated in 1956 as Thermo Electron Corporation. In Nov 2006, Thermo Fisher Scientific, Inc. was formed through the merger of Thermo Electron Corporation with Fisher Scientific International Inc.

On Feb 3, 2014, Thermo Fisher announced completion of the acquisition of Life Technologies Corporation. The acquisition was done by paying approximately $13.6 billion in cash, along with the assumption of $1.5 billion in net debt.

Following this acquisition, Thermo Fisher made changes in its reporting segments Per the changes, effective from Jan 1, 2014, the following segments are:

Life Sciences Solutions Segment: This is the new segment added by the company post the acquisition of Life Technology. It incorporates majority of the former Life Technologies and Thermo Fisher's Biosciences businesses. Although the segment has been recently added, the company has reported the results on a pro forma basis.

Analytical Instruments: Formerly known as Analytical Technology, this segment has been renamed in order to reflect the transfer of the bioprocess production business to the newly formed Life Sciences Solutions Segment post the takeover of Life Technologies. This segment caters majorly to industrial and applied markets.

Specialty Diagnostics (SD): This segment, formed after the acquisition of Phadia, serves customers in healthcare and clinical laboratories with a portfolio of diagnostic test kits, reagents and instruments used to increase the speed and accuracy of diagnoses to improve patient care. The segment also includes the company's healthcare market customer channel consisting of catalog, e-commerce and direct sales. This segment has six primary businesses Immuno Diagnostics, Clinical Diagnostics, Transplant Diagnostics, Microbiology, Anatomical Pathology and Healthcare Market Channel. Post-acquisition, management has incorporated the two small Specialty Diagnostics businesses within Life Technologies into the Specialty Diagnostics segment of the company.

Laboratory Products and Services (LPS): This segment serves laboratory customers with equipment and consumables that improve productivity and a range of BioPharma outsourcing services such as clinical trials management and logistics. This segment also includes the company's research and safety market customer channels consisting of catalog, e-commerce and direct sales. Post-acquisition, Thermo Fisher's Global Chemicals business has moved from the Biosciences business to the Laboratory Products and Services Segment.

End market review

Thermo Fisher derives its revenues from four end-markets Industrial/Applied, Pharma and Biotech, Healthcare and Government/Academic. The Academic/Government market has gone down slightly in the first quarter 2014 and thus continues to be a headwind for some segments. In two of the end markets Industrial/Applied and Healthcare and Diagnostics, Thermo Fisher experienced some improved market conditions in the first quarter 2014. Applied markets were led by demand for chromatography systems. In pharma and biotech, the company experienced high single-digit growth in the first quarter 2014.

Management continues to expect a rise of 50 basis points (bps) each in Academic/Government and Industrial/Applied in the near term as a result of modestly stronger end markets. However, management expects this rise to be partially offset by 100 bps approximately due to lower contribution from Pharma and Biotech which has been experiencing a growth rate in high-single digits for the last 2 years. However, a growth rate of mid-single digits based on Thermo Fisher's strong value proposition is still expected in the Pharma and Biotech end market. The company is also expecting a nominal amount of dilution from the acquisition-related divestitures which are growing faster than the company average.


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