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Thermo Fisher (TMO) End Markets Grow Strong, Margin Woe Stays

Thermo Fisher Scientific TMO, with several takeovers including the colossal $17.4-billion acquisition of PPD, is expanding its inorganic growth profile. The company’s strong focus on the emerging market is also encouraging. Yet, unfavorable macroeconomic conditions continue to weigh heavily on Thermo Fisher's stock, which currently carries a Zacks Rank #3 (Hold).

Thermo Fisher has outperformed its industry in the past year. The stock has lost 13.9% compared with the industry’s 18.6% decline.

The company exited the third quarter with better-than-expected results on 14% core organic revenue growth (considering the impact of PPD revenue and excluding the impacts of COVID-19 testing revenue). Organically, in Q3, North America grew in the low single digits and Asia Pacific grew in the same with China growing in the high single digits. Revenues in the Analytical Instruments Segment and the Laboratory Products and Biopharma Services segment showed strong year-over-year growth.

Thermo Fisher has raised its 2022 guidance. The company has increased its revenue guidance to $43.8 billion (from the earlier projection of $43.15 billion), reflecting 11% to 12% core organic revenue growth over 2021. Adjusted earnings per share guidance has been raised to $23.01 (from earlier $22.93) per share.

In third-quarter 2022, Thermo Fisher witnessed strength in three of its four end markets, categorized either by customer type or geography. Within the pharma and biotech end market, the company delivered growth in the mid-teens on growth across all businesses serving customers, highlighted by the bioproduction and pharma services businesses. In academics and government, Thermo Fisher grew in the mid-single digits, with good growth in biosciences and electron microscopy. Within industrial and applied, the company grew in the high teens during the quarter on broad-based growth in all its analytical instrument businesses including electron microscopy, chromatography and mass spectrometry.

In diagnostics and healthcare, although the company registered a decline during the third quarter, the core business performance was strong, driven by microbiology and transplant diagnostics businesses.

On the flip side, Thermo Fisher’s diagnostics and healthcare end-market revenues in Q3 declined approximately 30%. Revenues in the Life Sciences Solutions segment declined 20.4% year over year. Strong growth in the bioproduction business was more than offset by a moderation in testing revenue within the segment as the pandemic subsided. The Specialty Diagnostics segment recorded a 21.8% year-over-year fall in revenues in Q3. Strong underlying growth in the transplant diagnostics and microbiology businesses was offset by lower COVID testing revenues on a year-over-year basis.

The contraction of both margins on escalating costs and expenses does not bode well either. The year-over-year decline in adjusted earnings is also concerning.

Key Picks

Some better-ranked stocks in the broader medical space that have announced quarterly results are AMN Healthcare Services, Inc. AMN, Medpace Holdings, Inc. MEDP and Merit Medical Systems, Inc. MMSI.

AMN Healthcare, currently carrying a Zacks Rank #2 (Buy), reported third-quarter 2022 adjusted EPS of $2.57, which beat the Zacks Consensus Estimate by 10.3%. Revenues of $1.14 billion outpaced the consensus mark by 3.9%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

AMN Healthcare has an estimated long-term growth rate of 3.3%. AMN’s earnings surpassed estimates in all the trailing four quarters, the average being 10.9%.

Medpace Holdings, sporting a Zacks Rank #1, reported third-quarter 2022 EPS of $2.05, which beat the Zacks Consensus Estimate by 39.5%. Revenues of $383.7 million outpaced the consensus mark by 8.1%.

Medpace Holdings has an estimated growth rate of 44.9% for the full-year 2022. MEDP’s earnings surpassed estimates in all the trailing four quarters, the average being 22%.

Merit Medical, currently carrying a Zacks Rank of 2, reported third-quarter 2022 adjusted EPS of 64 cents, which beat the Zacks Consensus Estimate by 20.8%. Revenues of $287.2 million outpaced the consensus mark by 5.2%.

Merit Medical has an estimated long-term growth rate of 11%. MMSI’s earnings surpassed estimates in all the trailing four quarters, the average being 25.4%.

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