Earnings estimate revisions for Life Technologies (LIFE) have been mixed since the company announced its second quarter fiscal 2010 results on July 29, 2010.
Second Quarter Highlights
Life Technologies reported EPS of 58 cents in the second quarter of 2010, compared with 22 cents a year earlier. However, after adjusting for certain one-time items, EPS was 91 cents, surpassing the Zacks Consensus Estimate of 87 cents and 15% higher than 79 cents in the year-ago quarter.
Strong growth in all the divisions of Life helped adjusted revenues increase 8% year over year to $906 million, marginally ahead of the Zacks Consensus Estimate of $899 million. Excluding the impact of currency, acquisitions and divestitures, revenues grew 6%.
Life earns revenues primarily from three divisions – Molecular Biology Systems, Genetic Systems and Cell Systems, which recorded revenues of $434 million (annualized growth of 6%), $235 million (5%) and $230 million (13%), respectively.
Following the release of second-quarter results, Life increased the low end of its EPS guidance for fiscal 2010 by 5 cents to $3.35–$3.50 on mid-to-high, single digit organic revenue growth.
For a full coverage on the earnings, read: Life Beats Estimates
Estimate Revision Trends
In accordance with headwinds for the second half of 2010, the recent Zacks Consensus Estimate revision trends remain negative for the upcoming two quarters. However, the estimate revision trend for 2010 does not have a proper direction.
Over the past 30 days, twelve of the 16 analysts covering the stock have made downward revisions for the third quarter with no upward movement. The negative trend persists for the fourth quarter with 7 downward revisions, but 4 upward revisions. However, the scenario for the full year of 2010 is mixed with 6 negative and 5 positive revisions in the past 30 days. For 2011, six analysts have revised their estimates downward and 2 upward.
Analysts are concerned about the situation in Europe, where Life earns 32% of total revenues. Despite 4% growth recorded by this region during the second quarter, a probable reduction in government (UK, Germany and France) funding to researchers is foreseen. Spending in these countries on both consumables and instruments were lower toward the end of the quarter as researchers were cautious fearing curtailment of future funding. Further curtailment of funding will have a negative impact on the company’s top line in the forthcoming periods.
The scenario in the smaller markets of Italy and Spain is different as the current economic environment had a negative impact on funding. Revenue growth in these countries was flat during the second quarter.
Life has not witnessed a major increase in government stimulus funding since the third quarter of 2009. As a result, stimulus-related revenues are expected to be around $10 million per quarter in the second half of 2010, with the rest of the benefit to be realized in 2011. Based on the slower stimulus funding, Life expects organic growth in the second half to be in mid-single digits, rather than the high-single digits. Earlier this year, along with its guidance, Life stated that the difference between mid and high single digit organic revenue growth was tied to the amount of stimulus revenue recognized during the year.
Life earns 52% of its revenues from international operations, thereby exposing it to unfavorable currency movements. During the second quarter, currency movement had a favorable impact of 1.5 percentage points to revenues. However, based on the latest exchange rates and the impact of Life’s hedging programs, currency is expected to have a negative impact, albeit small on revenues in the third quarter. Moreover, in the fourth quarter, currency is expected to negatively impact revenues by 3 percentage points and EPS by $0.04-$0.05.
The comparison for the second half of 2010 will be difficult as the comparable period of 2009 had $15 million of H1N1 revenue per quarter, approximately $8-$9 million per quarter from the Japanese police order and stimulus revenues of $15 million. We believe these factors have prompted analysts toward a negative bias for the next two quarters.
However, on the positive side, Life is adopting several strategies that should enable the company to record robust performance in the long term. The company is focused on achieving significant synergies related to its merger with Applied Biosystems. Life is on track to realize $175 million in annual synergies by the end of 2010.
Magnitude of Estimate Revisions
The magnitude of estimate revisions for the forthcoming quarters has been modest. In the past 30 days, estimates for the third and fourth quarters have dropped by 4 cents to 78 cents and 1 cent to 87 cents, respectively. Moreover, estimates for fiscal years 2010 and 2011 have declined by 1 cent to $3.43 and 2 cents to $3.80, respectively, in the past 30 days.
Our Recommendation
Life Technologies Corporation enjoys a strong position in the life sciences market, and we believe a robust performance from its core business along with new product launches will help drive revenues going forward. Meanwhile, lower expenses and cost cutting, along with increased revenues, should help drive the bottom-line. Additionally, the company is increasing its focus on China where major investments on healthcare are expected in the near future. We are also impressed by Life’s focus on stem cell research, which holds immense potential in the long term.
However, we remain concerned about increased competition, lower growth of stimulus funding and the impact of currency movement. We are also concerned about the situation in the European market where funding might tighten due to the economic slowdown.
Given these factors, we are Neutral on the stock, which corresponds to the Zacks #3 Rank (hold).
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
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