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Thermo Fisher Scientific (TMO) is scheduled to report its third quarter fiscal 2010 results before the market opens on Wednesday, October 27, 2010. The company is expected to earn 83 cents (representing an increase of 6.4% from the year-ago quarter’s 78 cents) on revenues of $2.59 billion, according to the Zacks Consensus Estimate.

Barring the second quarter of fiscal 2010, Thermo Fisher has surpassed expectations in the last three quarters with a four-quarter positive surprise of 5.57%. This means that the company has beaten the Zacks Consensus Estimate by this magnitude over the last four quarters. Based on this favorable trend, there is a high probability that the company will exceed estimates in the upcoming quarter.

Following second quarter results, the company maintained its adjusted EPS guidance of $3.40-$3.50, representing a growth of 11% - 15% over 2009. However, unfavorable currency movements forced Thermo Fisher to lower its revenue guidance to $10.60-$10.75 billion from the previous guidance of $10.65-$10.80 billion. The company did not provide any guidance for the third quarter.

Previous Quarter Highlights

Thermo Fisher reported an EPS of 57 cents in the second quarter of 2010 compared to 49 cents in the year-ago period. However, after adjusting for certain one-time items, the EPS was 84 cents, meeting the Zacks Consensus Estimate and 14% higher than the second quarter of 2009.

The company reported revenues of $2.65 billion, up 7% compared to the year-ago quarter. Acquisitions had a positive impact of 3% on revenues while unfavorable currency movement brought down revenues by 1%. Reported revenues narrowly missed the Zacks Consensus Estimate of $2.67 billion.

Agreement of Analysts

Revisions in estimates for the third and fourth quarters have been mixed over the past month. Out of the 15 analysts covering the stock, 2 analysts each have revised their earnings estimates in opposite directions. A similar trend can be witnessed in the past week, where estimates were revised by 1 analyst each in both upward and downward directions. For fiscal 2010 and fiscal 2011, 2 analysts have increased their estimates without any revision in the opposite direction.

During the previous quarter, Thermo Fisher witnessed constrained capital spending in the biopharma market, particularly due to mergers and acquisitions, a trend that was expected to continue in the third quarter. Moreover, the situation in the pharmaceutical market was tough as pharmaceutical companies’ spending declined driven by consolidation of facilities.

While the company witnessed acceleration from the global stimulus program, the situation in the healthcare market remained soft due to a decline in doctor and hospital visits along with a weak flu season.

Thermo Fisher had provided a detailed outlook for the second half of 2010, which is supposed to be difficult due to the presence of certain issues. The company had four more calendar days during the first quarter of 2010 (compared to 2009), which had a positive impact of 4-5% on revenues.

As a result, there will be a comparable opposite impact in the fourth quarter. Additional headwinds consist of the termination of the Biosite contract (effective July 1, 2010), which is likely to hit second half revenues by approximately $55 million. The flu season was strong in 2009 compared to the expectation of a normal flu this year ($20 million impact). Both of these items will impact the third quarter more than the fourth.

Magnitude of Estimate Revisions

There have been no estimate revisions for the third quarter over the past 7 or 60 days. However, estimates for the quarter and fiscal 2010 have gone down by a penny over the past 3 months. The current Zacks Consensus Estimate for 2010 is $3.46, reflecting year-over-year growth of 13.4%.

Recommendation

A gradual improvement in the economic scenario along with the focus on emerging markets should drive Thermo Fisher’s top line in the forthcoming period. However, we remain concerned about the company’s exposure to foreign exchange risk, since it derived about 39% of its fiscal 2009 revenues from international operations.

Moreover, any kind of economic turbulence resulting from financial constraints or deferrals in buying decisions of customers could negatively impact the company’s sales.

We are currently Neutral on the stock, which corresponds to a Zacks #3 Rank (Hold).

Source: Thermo Fisher Scientific: Earnings Preview