TMO's Earnings Beat, LIFE Buyout on Track - Analyst Blog
April 24 2013 - 7:45AM
Zacks
Thermo Fisher Scientific (TMO) reported
adjusted earnings per share (“EPS”) of $1.37 in the first quarter
of fiscal 2013. This was 6.2% ahead of the Zacks Consensus Estimate
of $1.29 and surpassed the year-ago adjusted EPS by 17.1%. Amid a
challenging global economic environment, the company is encouraged
with this performance and expects to continue with this growth
momentum for the rest of 2013.
Revenues increased 4% year over year to reach $3.19 billion
during the quarter, higher than the Zacks Consensus Estimate of
$3.17 billion, based on 3% organic growth.
Thermo Fisher reports revenues under three segments – Analytical
Technologies, Specialty Diagnostics, and Laboratory Products and
Services. These three segments recorded revenues of $978 million
(0.2% annualized growth), $806 million (up 10%) and $1.54 billion
(up 5%), during the first quarter, respectively.
Gross margin contracted 36 basis points (bps) to 43.6% during
the quarter. However, Thermo Fisher witnessed a 7.7% increase in
adjusted operating income for the first quarter of 2013 to $600.6
million leading to an adjusted operating margin of 18.8%, up 58 bps
year over year. Adjusted figures exclude amortization of
acquisition-related intangible assets and restructuring costs and
related tax benefits.
The company exited the fiscal with cash and cash equivalents of
$1.0 billion compared with $851 million at the end of Dec 2012. A
strong cash balance helps the company pursue suitable acquisitions
or reward its shareholders through share buybacks. During the
reported quarter, the company deployed $90 million to repurchase
1.3 million shares.
Life Technologies Acquisition
Earlier this month, Thermo Fisher disclosed that it will acquire
Life Technologies (LIFE) for roughly $13.6 billion
(or $76 per share), plus the assumption of Life Technologies’ net
debt ($2.2 billion as of year-end 2012).
Life Technologies preferred Thermo Fisher as a potential buyer
against the consortium of private equity firms. Thermo Fisher was
not willing to lose its chance to become an unparalleled industry
leader to other potential buyers.
From the financial perspective, the buyout is expected to be
immediately accretive to Thermo Fisher’s adjusted earnings by 90
cents to $1.00 within the first full year of the takeover. Further,
the acquisition is expected to create significant cost and revenue
synergies for the company with adjusted operating income synergies
of $85 million in the first year.
Within three years of completion of the acquisition, Thermo
Fisher envisages adjusted operating income synergy of $275 million,
comprising $250 million and $25 million of cost and revenue
synergies, respectively. Apart from strong cash flow, the company
also expects adjusted return on invested capital (ROIC) to surpass
the cost of capital by the fourth year.
Thermo Fisher expects to close the acquisition in early 2014,
subject to standard closing conditions and Life shareholder vote.
The total price of the purchase of $13.6 billion includes cash and
debt of $9.5–$10.0 billion and as much as $4.0 billion in
equity.
Guidance
Accordingly, Thermo Fisher provided an update to its fiscal 2013
guidance. The company tightened its revenue guidance to
$12.84−$13.00 billion from the earlier $12.80−$13.00 billion
reflecting annualized growth rate of 3%−4%.
The company also expects adjusted EPS in the band of $5.27−$5.39
from earlier provided range of $5.32−$5.46 for 2013. This will
result in annualized growth rate of 7%−9% (earlier range being
8%−11%). The lowering of EPS guidance reflects its decision to
suspend share buybacks for the rest of the year and tighten its
revenue guidance range. The 2013 guidance does not include the
effect of the proposed acquisition of Life Technologies or the
impact of related financing activities.
The current Zacks Consensus Estimates for EPS $5.41 falls
outside the guided range. The current revenue estimate of $12.98
billion, however, is within the projected range.
Recommendation
For most of the last 7 years, Thermo Fisher has supported its
business momentum by acquiring several entities. Nevertheless, the
acquisition of Life Technologies is the biggest ever deal for
Thermo Fisher, since its inception in 2006. This acquisition has
helped the company prove its strength to continue with acquisitions
and grow further.
Given Life Technologies’ expansive line of consumables for
genomic, and molecular and cell biology, the buyout will complement
Thermo Fisher’s market-leading portfolio of analytical technologies
and specialty diagnostic. The takeover will seamlessly strengthen
Thermo Fisher’s global foothold and commercial reach.
The acquisition will create a kingpin in the research, specialty
diagnostics and applied markets. As per management at Thermo
Fisher, the acquisition supports its three-pronged growth strategy
of technological innovation, a unique customer value proposition
and expansion in emerging markets.
In addition, substantial expansion in the Asia-Pacific market,
mainly China, is in the cards for the company. Given the huge
potential in the region and high growth rate in China, Thermo
Fisher is likely to exceed its goal of garnering 25% revenues from
the high-growth Asia-Pacific region and emerging markets by
2016.
Thermo Fisher retains a Zacks Rank #3 (Hold). Medical devices
stocks such as Cyberonics Inc. (CYBX) and
Health Net Inc. (HNT), which carry a Zacks Rank #1
(Strong Buy) are worth considering.
CYBERONICS INC (CYBX): Free Stock Analysis Report
HEALTH NET INC (HNT): Free Stock Analysis Report
LIFE TECHNOLOGS (LIFE): Free Stock Analysis Report
THERMO FISHER (TMO): Free Stock Analysis Report
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