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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
Referenced Stocks: TMO;SD

Having completed another full quarter post the Life Technologies acquisition, Thermo Fisher posted a mixed third quarter with adjusted EPS of $1.71, ahead of the Zacks Consensus Estimate and the year-ago adjusted number by 31.5%. Revenues of $4.17 billion, although sailed past the year-ago number by 30.7%, missed the Zacks Consensus Estimate of $4.23 billion. The company is on track with the integration process and expects to achieve $110 million in synergies in 2014, up from the $85 million originally anticipated. However, in a challenging market environment, still low organic growth remains a concern. Moreover, economic uncertainties and currency headwinds continue to act as dampeners. We are thus Neutral' on the stock.


Headquartered in Waltham, MA, 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 the much-anticipated completion of the acquisition of Life Technologies Corporation. The acquisition was closed on payment of approximately $13.6 billion in cash, along with the assumption of $1.5 billion in net debt.

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

Life Sciences Solutions Segment: This is the new segment added by the company post the acquisition of Life Technologies. It incorporates majority of the former Life Technologies and Thermo Fisher's Biosciences businesses. Although the segment has been only 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 Thermo Fisher.

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 of 2014 and thus continues to be a headwind for some segments. On the other hand, in two of the end markets Industrial/Applied and Healthcare and Diagnostics Thermo Fisher experienced some improved market conditions in the first quarter. Applied markets were led by demand for chromatography systems. In pharma and biotech, the company experienced high single-digit growth in the first quarter as well.

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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