Will Thermo Fisher (TMO) Surprise Q4 Earnings Expectations?

Last quarter, the company had delivered a positive earnings surprise of 0.56%. Notably, Thermo Fisher’s earnings have outpaced the Zacks Consensus Estimate in all of the past four quarters, with an average beat of 1.94%. Let’s see how things are shaping up prior to this announcement.

Factors at Play

According to Thermo Fisher, it is making significant headway in terms of the Life Technologies integration and witnessing considerable progress in the execution of its plans. The company expects revenue synergies to accelerate through 2015 and is thus confident of achieving the full-year guidance of $60 million in revenue synergies. Till the end of the third quarter, revenue synergies were $50 million, close to the company’s earlier target of $60 million by 2015. This puts the company in a position to exceed its full year 2015 target and chase a new target of delivering $150 million of revenue synergies in 2016.

Thermo Fisher also expects to deliver $130 million in cost synergy benefits by the end of 2015, primarily because of speedy realization of head count and sourcing synergies. The company is also confident of its overall three-year synergy target which has been raised from $300 million to $350 million.

Apart from the Life Technologies integration, we are also focusing on the company’s emerging market growth strategies. In the third quarter, the company returned to double-digit growth in China. We also foresee huge potential for the company in the relatively underpenetrated market in the Middle East. The company expects to garner 25% of total revenue from the high-growth Asia-Pacific and emerging markets by 2016 from 19% in 2011 (10% in 2006). Thermo Fisher’s expanding presence in emerging markets will continue to be an important growth driver for the fourth quarter.

We are also positive about Thermo Fisher’s recent acquisition of Heysham, U.K.-based research chemical manufacturer – Alfa Aesar. This acquisition is expected to help the company expand its existing portfolio of chemicals, solvents and reagents that support laboratory applications including research, drug discovery and development, and production. Apart from boosting revenue accretion, it should benefit the company’s operating margin while also resulting in tax synergies.

In this context, the company’s recent decision to buy Affymetrix Inc. (AFFX) for $1.3 billion also warrants mention. Affymetrix, which works on multiplex and simultaneous analysis of biological systems at the cell, protein, and gene level, facilitating the transition of research tools into clinical and applied markets, is expected to boost Thermo Fisher’s offering in the fast-growing flow cytometry market through an advanced antibody portfolio. Although this impending acquisition will not have any impact on the company’s fourth quarter performance, investor sentiment is picking up based on this news.

However, given a difficult foreign exchange environment that is expected to persist, Thermo Fisher had projected a disappointing operating performance for the year, which is expected to be echoed in the fourth quarter as well. Thermo Fisher currently estimates 69 cents per share or 10% year-over-year impact of foreign exchange on the company’s 2015 outlook.

Considering the current foreign exchange rates and the addition of Alfa Aesar, the company currently expects full year revenues in the range of $16.81−$16.91 billion, up from the earlier guided $16.72−$16.86 billion.  The company has also raised the lower-end of its adjusted EPS guidance for the full year. Adjusted EPS is now estimated in the range of $7.33 to $7.41 (earlier $7.28 to $7.41), which translates into 5% to 6% growth over 2014.

Earnings Whispers

Our proven model does not conclusively show that Thermo Fisher is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP:  Thermo Fisher has an earnings ESP of -0.47%. That is because the Most Accurate Estimate of $2.10 is pegged lower than the Zacks Consensus Estimate of $2.11.

Zacks Rank: Thermo Fisher has a Zacks Rank #3 (Hold) which increases the predictive power of ESP. However, a negative ESP makes surprise prediction difficult.

Meanwhile, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions. Ordeal

Stocks to Consider

Here are some companies you may want to consider as our model shows they have the right combination of elements to post an earnings beat in the upcoming quarter:

Gilead Sciences Inc. GILD, earnings ESP of +5.86% and a Zacks Rank #1.

Streamline Health Solutions, Inc. STRM, earnings ESP of +11.11% and a Zacks Rank #1.

Accuray Incorporated ARAY, earnings ESP of +100.00% and a Zacks Rank #2.

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