DNEX Dionex Corp. (MM)

Thermo Fisher Scientific (TMO) reported an EPS of 64 cents in the first quarter of fiscal 2011 compared to 56 cents in the year-ago period. However, after adjusting for certain one-time items, the EPS was 92 cents, surpassing the Zacks Consensus Estimate of 88 cents and  earnings of 82 cents in the first quarter of 2010 by 12%.

The company’s revenue of $2.72 billion during the quarter marginally beat the Zacks Consensus Estimate of $2.71 billion and was 4% higher than $2.63 billion in the first quarter of fiscal 2010. Acquisitions had a positive impact of 2% on revenues with 1% favorable effect from currency movement.

While revenues increased 4%, Thermo Fisher’s EPS increased at a higher rate driven by improvement in operating margin, higher interest income and a 5.6% decline in share count, partially offset by a 25% rise in interest expense. Thermo Fisher’s two segments – Analytical Technologies and Laboratory Products and Services – recorded revenues of $1.18 billion (9% annualized growth) during the quarter and $1.69 billion (up 1%), respectively.

Thermo Fisher witnessed an expansion in margins in the first quarter. Gross margin increased 60 basis points (bps) annually to 42.4%. Adjusted operating and net margin increased 30 bps each to 17.6% and 13.3%, respectively. Adjusted figures exclude amortization of acquisition-related intangible assets and other acquisition-related costs; restructuring costs and related tax benefits.

The company exited the quarter with cash and cash equivalents of $2.8 billion compared with $917.1 million at the end of December 2010. A strong cash balance helps the company pursue suitable acquisitions or reward its shareholders through share buybacks.

Thermo Fisher spent $538 million to buy back 9.6 million shares and was left with $700 million of authorization at quarter end. The company also sold two laboratory-testing services businesses – Athena Diagnostics and Lancaster Laboratories resulting in total proceeds of $940 million.

Guidance

Based on a strong quarter, Thermo Fisher raised its guidance for fiscal 2011. The company expects revenue in the range of $11.52-$11.62 billion (previous guidance of $11.33-$11.45 billion) and representing growth of 9%-10%.

Moreover, the adjusted EPS was raised by 5 cents to $4.05-$4.15, representing a 17%-20% growth. While the Zacks Consensus Estimate of $4.06 is at the lower end of the guidance, the revenue estimate of $11.44 billion is much lower than the company’s outlook. This guidance includes the acquisition of Dionex Corporation (DNEX), which is expected to close in mid-May.

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. The company is increasing investment in emerging markets with plans to build new manufacturing facility in China to serve local life sciences customers.

Moreover, strong cash position should assist the company in making suitable acquisitions, reduce debt burden or repurchase shares. However, any kind of economic turbulence could negatively impact the company’s sales based on financial constraints and customers deferring their purchase.

We are currently Neutral on the stock, which also corresponds to the Zacks #3 Rank (Hold) in the short-term.

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