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Subsequent to the announcement of Thermo Fisher Scientific’s (TMO) third quarter fiscal 2010 results on October 27, 2010, revision of estimates among analysts depict a positive trend for both fiscal 2010 and 2011.

Third Quarter Highlights
Thermo Fisher reported an EPS of 66 cents in the third quarter of fiscal 2010 compared to 53 cents in the year-ago period. However, after adjusting for certain one-time items, the EPS was 90 cents, way above the Zacks Consensus Estimate of 83 cents and 15% higher than 78 cents in the third quarter of 2009. The company reported a 6% annualized growth in revenues to $2.68 billion, which surpassed the Zacks Consensus Estimate of $2.59 billion. Strong growth in instruments, equipment and clinical diagnostics and biosciences businesses led to the growth.

A strong quarter ensures that Thermo Fisher will be able to meet its earnings growth outlook for 2010. The company increased its revenue and adjusted EPS guidance to $10.72 - $10.80 billion, representing an annualized growth of 6% - 7% (previous guidance of $10.60 - $10.75 billion) and $3.47 - $3.53, representing a 14% - 16% growth ($3.40 - $3.50 earlier), respectively.

While revenue guidance has been increased due to improved foreign currency translation and better-than-expected organic growth during the third quarter, adjusted EPS was raised due to higher revenues, increasing share buyback program and slightly lower tax rate.

For a full coverage on the earnings, read here.

Estimate Revision Trends
Subsequent to the announcement of strong third quarter results and an encouraging outlook, analysts have raised their estimates for both fiscal 2010 and 2011. However, the situation is a bit different for the fourth quarter as 8 analysts have reduced their estimates in the past 30 days with 3 upward revisions.

The fourth quarter of 2010 will be difficult for Thermo Fisher 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%. 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) and a strong flu season in 2009 compared to the expectation of a normal flu this year. These two events are expected to negatively impact full year revenue growth by over 1%. Contract termination, difficult flu comparison and fewer calendar days are expected to hit the fourth quarter growth by about 6 percentage points, resulting in reported organic growth of -3% to -1%. However, on adjusting for these headwinds, organic growth guidance during the quarter would be 3% - 5%.

We note that having been encouraged by the various strategies adopted by Thermo Fisher and a gradual improvement in its end markets, analysts are bullish about the company’s performance in the forthcoming period. For both the fiscals, 14 analysts have raised their estimates over the past 30 days without any downward revisions. One analyst has raised his/her estimate for fiscal 2010 during the week.

Thermo Fisher has strong international operations and derived 39% of its revenues in fiscal 2009 from the international market. Within the Asian market, the company is focusing on China and India, both of which holds immense potential. The company’s focus on these regions is evident from the robust growth in their revenues. Bookings were stronger than revenues in the Asia-Pacific region, particularly in China and India, where double-digit growth was recorded. Based on strong booking momentum, the company expects the Asian market to be the fastest growing geography going ahead.

Thermo Fisher’s focus on improving its product portfolio and developing newer technologies should enable it to record growth going ahead. During the third quarter of 2010, Thermo Fisher stepped up R&D spend by 30 basis points (2.7% of revenues) to expand its pipeline of new technologies.

Magnitude of Estimate Revisions
The magnitude of estimate revisions for the next two quarters has been modest. In the past 30 days, estimate for the fourth quarter has dropped by 1 cent while estimate for the first quarter of 2011 has gone up by 1 cent. Moreover, estimates for fiscal years 2010 and 2011 have increased by 4 cents to $3.52 and 10 cents to $3.97, respectively, in the past 30 days.

Recommendation
After a drop in revenues during 2009, Thermo Fisher is back on the growth trajectory. A gradual improvement in the economic scenario along with its focus on potential markets and other strategies should drive its top line in the forthcoming period. Moreover, Thermo Fisher’s strong cash position should assist in making suitable acquisitions, reduce debt burden or repurchase shares. As a result, the Zacks #2 Rank (Buy) is based on the near-term outlook of the company.

Although economic recovery is reflected through improved performance, the company still witnesses pricing pressure, though modest. Moreover, economic turbulence could negatively impact the company’s sales due to financial constraints and customers deferring their buying decisions. Weighing these factors, over the long term, we are “Neutral” on the stock.

Source: Earnings Scorecard: Thermo Fisher

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