Thermo Fisher (TMO) Tops Q3 Earnings, Raises '16 Outlook

Thermo Fisher Scientific, Inc. (NYSE:TMO) reported better-than-expected third-quarter 2016 financial results. Adjusted earnings per share (EPS) in the quarter came in at $2.03, exceeding the Zacks Consensus Estimate by 3% and ahead of the year-ago quarter number by 12.8%.

On a reported basis, third-quarter EPS of $1.19 marked a 0.8% year-over-year improvement.

Quarter in Detail

Revenues for the reported quarter came in at $4.49 billion, up 9% year over year and ahead of the Zacks Consensus Estimate of $4.39 billion. Organic revenue growth in the quarter was 4% while revenues rose 5% on the back of acquisitions. Total revenue was slightly offset by currency translation.

Thermo Fisher currently operates under four business segments: Life Sciences Solutions, Analytical Instruments, Specialty Diagnostics, and Laboratory Products and Services.

Impressively, Thermo Fisher delivered positive year-over-year growth in each of its business segments during the third quarter. Revenues from the Life Sciences Solutions Segment improved 14% year over year to $1.23 billion, while Analytical Instruments Segment sales grew 15% to $900 million. Revenues from the Laboratory Products and Services Segment rose 7% to $1.75 billion, while the Specialty Diagnostics Segment recorded 3% revenue growth to $800 million.

Gross margin of 48.1% during the third quarter was down 11 basis points (bps) year over year due to higher cost of sales, despite an increase in revenues. Adjusted operating margin contracted approximately 115 bps to 20.8% owing to the company incurring a 14.5% rise in selling, general and administrative expenses and a 6.8% increase in research and development expenses.

The company exited the third quarter of 2016 with cash and cash equivalents of $1.97 billion compared with $663.1 million at the end of second-quarter 2016. Year-to-date operating cash flow was $1.95 billion compared with the year-ago figure of $1.59 billion.

Guidance

Thermo Fisher has raised its full-year 2016 financial guidance, primarily based on three factors – the inclusion of FEI, strong operational performance in the first nine months of 2016 and a more favorable foreign exchange environment. Adjusted EPS is currently expected in the range of $8.19–$8.30, indicating 11%–12% growth year over year (earlier guidance was $8.07 to $8.20 and growth of 9% to 11%).

The company expects to deliver revenues in the range of $18.25–$18.39 billion (earlier view $17.84–$18.00 billion) in 2016. The current Zacks Consensus Estimate stands at earnings of $8.20 per share and revenues of $18.11 billion. While our EPS expectation remains within but close to the lower end of the guidance range, the same for revenues is below the company’s expectation.

Bottom Line

Thermo Fisher’s financial numbers squarely beat the Zacks Consensus Estimate in the third quarter, in line with the trend that the company displayed in the rest of its quarterly reports during 2016. We remain encouraged by the company’s recent product launches along with strong growth in emerging markets and better management observed in its customer value proposition.

Looking ahead, Thermo Fisher recently completed the acquisition of FEI, which is expected to add leading capabilities in electron microscopy that in turn will complement the company’s analytical instruments portfolio. Also, the raised 2016 guidance raises our confidence in the stock.

Zacks Rank & Key Picks

Thermo Fisher currently has a Zacks Rank #2 (Buy). Some other top-ranked stocks in the broader medical space include GW Pharmaceuticals plc (NASDAQ:GWPH) , Quidel Corp. (NASDAQ:QDEL) and Baxter International Inc. (NYSE:BAX) . GW Pharmaceuticals sports a Zacks Rank #1 (Strong Buy), while Quidel and Baxter carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

GW Pharmaceuticals surged 69.6% year to date compared to the S&P 500’s 4.67% over the same period. The company’s four-quarter average earnings surprise is 41.7%.

Quidel rallied 23.5% in the past one year, higher than the S&P 500’s 2.35%. Over the next five years, the stock is estimated to record an earnings growth rate of 20%, higher than the industry average of 15.1%.

Baxter’s shares soared 24.4% year to date. Over the next five years, the stock is expected to see 12.3% earnings growth. It has a trailing four-quarter average earnings surprise of 27%.

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