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Subsequent to the announcement of Life Technologies’ (NASDAQ:LIFE) third quarter fiscal 2010 results on October 26, 2010, revision of estimates among analysts depict a mixed trend for both fiscal 2010 and 2011.

Second Quarter Highlights

Life Technologies reported an EPS of 56 cents in the third quarter of 2010 compared with 22 cents in the year-ago period. However, after adjusting for certain one-time items, the EPS was 87 cents, surpassing the Zacks Consensus Estimate of 78 cents and 19% higher than 73 cents in the year-ago quarter.

Growth in all the divisions of Life Technologies helped adjusted revenues increase 8% year over year to $869 million, ahead of the Zacks Consensus Estimate of $857 million. Excluding the impact of currency, acquisitions and divestitures, revenues grew 6% and 9% after excluding the previous year’s impact of H1N1 and the large Japanese forensic order.

On a geographical basis, barring Japan where revenues declined 1%, revenue growth was witnessed across all other regions: Europe – 5%, Asia-Pacific – 7% and the Americas – 8%. Although revenues increased 8%, EPS was higher by 19% due to an improvement in operating margin (29% compared with the year-ago quarter’s 27.3%), lower interest expense (27.7%), lower adjusted tax rate (25.8% versus 29.1%), partially offset by a 22.4% rise in the share count.

Following the release of third-quarter results, Life increased its EPS guidance for fiscal 2010 to $3.48–$3.52 from the previous guidance of $3.35–$3.50. In addition, organic revenue during the fourth quarter is expected to increase in the mid-single digits.

For a full coverage on the earnings, read: here

Estimate Revision Trends

In accordance with the company’s current outlook, the recent Zacks Consensus Estimate revision trends remain positive for fiscal 2010 and fiscal 2011. However, estimate revision trends for the next two quarters is mixed. Over the past 30 days, while 7 analysts have lowered their estimates, 5 have moved in the opposite direction.

Over the past 30 days, 14 of the 16 analysts covering the stock have raised their estimates for fiscal 2010 without any movement in the opposite direction. The positive trend persists for fiscal 2011 as well with 12 analysts raising their estimates, with only 1 moving in the opposite direction.

Life Technologies’ existing business segments continue to impress with their strong performance, which prompted the analysts to raise their outlook. Since 2007, EPS has grown at CAGR of 20% from $2.03 to the current Zacks Consensus Estimate of $3.51 for 2010. Moreover, free cash flow has more than doubled over the same period. Over the last two years, the company has been trying to create the optimal portfolio of products through innovations and acquisitions, the latest being Ion Torrent. The company derives 20% of revenues from proprietary instruments, which in turn drive the demand for high-margin consumables that account for the remaining 80%. Higher proportion of high margin consumables helps to generate significant free cash flow on a consistent basis.

The strong balance sheet of Life is also encouraging as it is focused on debt repayment, suitable acquisitions and share buyback programs. The company achieved its targeted leverage of 2x to 2.5x EBITDA during the third quarter of 2010. The company has adopted several strategies during the third quarter including completion of the European back-office consolidation, site consolidations in Asia, and the placement of approximately 90 dual-branded supply centers worldwide. These steps have resulted in $25 million of synergies during the quarter. We note that adjusted operating margin during the quarter improved 170 bps to 29% driven by acquisition related synergies and cost controls implemented during the quarter.

Magnitude of Estimate Revisions

The magnitude of estimate revisions for the forthcoming quarters has been modest. In the past 30 days, estimates for the fourth quarter remained unchanged while estimates for the first quarter of fiscal 2011 have increased by a penny to 92 cents. Moreover, estimates for fiscal years 2010 and 2011 have increased by 9 cents to $3.51 and 5 cents to $3.84, respectively, in the past 30 days.

Recommendation

Life Technologies Corporation enjoys a strong position in the life sciences market and we believe robust performance from its core business along with new product launches will help drive revenues going forward. Meanwhile, lower expenses and cost cutting along with increased revenues should help drive the bottom line. Additionally, the company is shifting its focus on emerging markets that bode well for long term growth. We are also impressed by Life’s focus on stem cell research, which holds immense potential in the long term. Although the economy is gradually recovering, any kind of hiccups in the process will affect the company. Moreover, Life is highly exposed to the fluctuations of foreign currency movement.

For the long term, we have a “Neutral” rating on Life Tech. The stock retains a Zacks #3 Rank (Hold) for the short term.

Disclosure: No position

Source: Life Technologies: Earnings Scorecard