Recently, we reaffirmed our Neutral recommendation on Thermo Fisher Scientific (TMO) with a target price of $65.00.
Thermo Fisher Scientific reported an adjusted EPS of 92 cents in the first quarter of fiscal 2011, surpassing the Zacks Consensus Estimate of 88 cents and earnings of 82 cents in the first quarter of 2010. Revenues increased 4% year over year to $2.72 billion and marginally beating the Zacks Consensus Estimate of $2.71 billion. Acquisitions had a positive impact of 2% on revenues with 1% favorable effect from currency movement.
Thermo Fisher has undertaken several acquisitions in the past, the latest being, Dionex Corporation for total enterprise value of $2.1 billion. By combining the ion and liquid chromatography capabilities of Dionex with its existing chromatography offering, Thermo Fisher expects to create an industry-leading chromatography portfolio. This in turn will further strengthen its leading position in mass spectrometry business. The company will also benefit from Dionex's extensive customer base in applied markets such as environmental, food safety and other industrial sectors. Moreover, with more than 35% of revenues being derived from Asia Pacific and other emerging geographies, Dionex fits perfectly with Thermo Fisher’s strategy of expansion in these high-growth regions.
The company has been recording improvement in operating margins over the past few quarters. This was possible due to the adoption of Practical Process Improvement (PPI) and PPI-Lean projects, continued tight cost control on discretionary spending and infrastructure optimization that includes reduced footprint and expanded low-cost region (LCR) manufacturing (China, Mexico and Eastern Europe).
Growth in the emerging markets was particularly strong in the first quarter. The company recorded more than 20% growth in China and over 30% growth in India and Brazil. With a focus to expand in the Asia-Pacific region, Thermo Fisher has decided to build a new factory in Suzhou to support China's focus on building its R&D infrastructure. This will provide the company the required capacity to produce laboratory consumables for growing local life sciences markets.
However, the company’s business depends heavily on general economic conditions. Thermo Fisher makes scientific instruments which are primarily of big ticket sizes and non life-sustaining in nature. Economic turbulence could negatively impact the company’s sales due to financial constraints and customers deferring their buying decisions.
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