Thermo Fisher (TMO) Likely to Top Q3 Earnings Estimates

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Massachusetts-based medical instruments manufacturer Thermo Fisher Scientific, Inc.TMO is slated to report its third-quarter 2015 earnings numbers before the opening bell on Oct 21.

Last quarter, the company had delivered a positive earnings surprise of 3.8%. Notably, Thermo Fisher's earnings have outpaced the Zacks Consensus Estimate in all of the past four quarters, with an average beat of 2.09%. Let's see how things are shaping up prior to this announcement.

Why a Likely Positive Surprise?

Our proven model shows that the company is likely to beat earnings because it has the right combination of two key ingredients.

Zacks ESP: Thermo Fisher has an Earnings ESP of +1.12%. That is because the Most Accurate Estimate is $1.80 while the Zacks Consensus Estimate is pegged lower at $1.78. This is a meaningful and leading indicator of a likely positive earnings surprise.

Zacks Rank: Thermo Fisher has a Zacks Rank #2 (Buy). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 or 3 (Hold) have a significantly higher chance of beating earnings estimates. Conversely, Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.

The combination of Thermo Fisher's Zacks Rank #2 and 1.12% ESP makes us confident of a positive earnings beat at the company.

What is Driving the Better than Expected Earnings?

According to Thermo Fisher, it is making significant headway in terms of the Life Technologies integration and witnessing considerable progress in the execution of its plans. The company expects revenue synergies to accelerate through 2015 and is thus confident of achieving the full-year 2015 guidance of $60 million in revenue synergies. Till the end of the second quarter, revenue synergies were only $25 million, lower than the midpoint of the target. We expect a solid ramp up in the same during the third quarter.

The company also expects to deliver $130 million in cost synergy benefits by the end of 2015, $5 million more than the earlier target, primarily because of speedy realization of head count and sourcing synergies. The company is also confident of its overall three-year synergy target which has been raised from $300 million to $350 million.

Apart from the Life Technologies integration, we are also focusing on the company's emerging market growth strategies. In the second quarter, the company returned to double-digit growth in China. We also foresee huge potential for the company in the relatively underpenetrated market in the Middle East, where it had opened its first customer experience center in the last quarter. According to the company, Middle Eastern countries represent a good long-term opportunity with heavy investment in research, healthcare, food safety and environment. We expect a significant reflection of this initiative in Thermo Fisher's third quarter results.

We are also positive about Thermo Fisher's recently completed acquisition of Heysham, U.K.-based research chemical manufacturer - Alfa Aesar. This acquisition is expected to help the company expand its existing portfolio of chemicals, solvents and reagents that support laboratory applications including research, drug discovery and development, and production. Apart from boosting revenue accretion, such deals have historically benefited the company's operating margin while also resulting in tax synergies.

However, given a difficult foreign exchange environment that is expected to persist, Thermo Fisher projects a disappointing operating performance for the year which is expected to be echoed in the third quarter as well. This updated guidance takes into consideration a higher unfavorable change in foreign currency exchange rates and the acquisition of Advanced Scientifics (ASI). The company expects its 2015 revenues in the range of $16.67−$16.83 billion, a significant reduction from the earlier guided $16.80−$17.0 billion. For 2015, EPS is expected in the range of $7.25 to $7.40 (earlier $7.22-$7.40), which translates into 4% to 6% growth over 2014.

However, Thermo Fisher continues to face challenging growth-hindering headwinds like a deteriorating economic scenario in the international market, exposure to fluctuating foreign currency and tough competition from potent rivals.

Other Stocks to Consider

Here are some other companies you may want to consider as our model shows they too have the right combination of elements to post an earnings beat this quarter:

ICON Public Limited Company ICLR , earnings ESP of +1.00% and a Zacks Rank #1.

Masimo Corporation MASI , earnings ESP of +3.23% and a Zacks Rank #1.

Myriad Genetics, Inc. MYGN , earnings ESP of +2.85% and a Zacks Rank #2.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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