| | From GS:
The company’s conference call to discuss 2Q02 results yielded no real
surprises. Thermo Electron reported solid 2Q02 results in a challenging
environment, exceeding both our top and bottom line estimates. The
company posted 2Q02 diluted cash EPS of $0.24 (up 5% y/y), beating our
estimate and consensus by two cents. Reported revenue of $509M exceeded
our estimate by roughly $11M, driven by stronger-than-expected Optical
Technologies revenue and more favorable currency translations. We are
maintaining our EPS estimates for 2002 and 2003 of $0.95 and $1.10 and our
Market Outperformer rating.
Overall, we are pleased that Thermo Electron’s 2Q02 results exceeded our
expectations in the face of tough operating conditions. The company
posted sequential revenue growth significantly above our expectations,
despite sluggish demand from certain life sciences and industrial endmarkets.
Demonstrating progress with the company’s productivity
initiatives, operating margins expanded over 100 bps sequentially, with a
100 bps decline in SG&A and 30 bps decline in R&D offsetting a slight
decline in gross margins. 2Q02 diluted cash EPS for 2Q02 also benefited
from slightly more favorable net interest expense and other income and a
lower tax rate, as compared with 1Q02.
Management believes the company is on track to achieve its cost savings
target of $70M target in 2002. During the quarter, the company lowered
headcount by 300 people and closed 14 facilities.
The company reaffirmed 2002 EPS guidance of $0.95-$1.00 and provided
3Q02 EPS guidance of $0.23-$0.25. General macroeconomic conditions
and prospects for a 2H02 recovery in industrial capital spending have
clearly deteriorated since management originally provided 2002 EPS
guidance. However, solid progress on the company’s productivity
initiatives gives management confidence that this guidance range remains
achievable, even with somewhat lower-than-expected top-line growth.
LIFE AND LABORATORY SCIENCES. Organic revenue for Life and Laboratory
Sciences dropped 1% y/y, as continued strength in mass spectrometry and
clinical diagnostics was not enough to offset soft demand for spectroscopy
instruments and sample prep products. Falling 50 bps short of our
expectations, operating margins of 16.5% were up over 350 bps y/y but flat
sequentially.
*** Orders for mass spectrometry products for life sciences applications
increased 10% y/y, but unit revenue increased only 3% y/y.
***As demand for general-purpose lab equipment by pharma customers remained
weak, Bioscience revenue dropped an estimated 5-7% y/y. Sales of
microplate readers were particularly soft.
MEASUREMENT AND CONTROL. Organic revenue for Measurement and Control
dropped 11% y/y, as sluggish capital spending from industrial end-markets
again weighed on results. Beating our estimate by 40 bps, operating
margins of 10.4% were down 30 bps y/y due to decreased operating leverage
on a lower revenue base, but increased roughly 50 bps sequentially.
***Strengthening sales to food and beverage customers and key orders for
security systems represented pockets of strength for Measurement and
Control.
***Although demand from oil and gas and power generation customer remained
weak, the company is seeing some signs of strengthening demand from
semiconductor customers.
OPTICAL TECHNOLOGIES. Organic revenue growth for Optical Technologies
declined 15% y/y, but significantly exceeded our expectations on strong
sales of laser products. Topping our estimate by 40 bps, operating margins
of 2.4% were down roughly 490 y/y due to the steep revenue decline, but
increased roughly 480 basis points sequentially.
***Orders from semicon customers showed some pick-up, but management
remains somewhat cautious as to the sustainability of the more favorable
environment.
VALUATION. Thermo Electron shares are trading at 16.4X and 14.1X our 2002
and 2003 EPS estimates (adjusted to include intangibles amortization),
representing a small discount to comparable diversified life sciences tools
stocks. Our sum-of-the-parts analysis suggests that Thermo Electron shares
should trade at roughly $18-$19. |
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