How Sequestration's Squeezing These Science Stocks

The sequestration cuts earlier this year slashed the National Institutes of Health, or NIH, budget by 5.1%, affecting 2,000-2,300 grants given to researchers and scientists. Considering that academic spending accounts for about 40% of sales for life-science tool companies, that's quite an impact.

Despite this challenges, and the ongoing crunch of a global economic slump, some of these scientific companies are making strategic moves to save cash and increase their operating margin. Let's see what they're up to.

PerkinElmer: Good quarter, low exposure
First, we have PerkinElmer (NYSE: PKI  ) , a leader in several life science segments. The company posted a decent third quarter, with revenue up 3% year over year to $524.3 million, and operating margin improving to 10.9% from 8.5% the year before.

PerkinElmer is reorganizing to add new areas and divest others. The company aims to move into higher-growth offerings like proteomics -- assisting the large-scale study of proteins -- and genetic screening technologies. By positioning itself in these fields, the company will expand its operating margin, which is happening already.

Regarding the sequestration, and considering that the company's exposure to NIH-funded labs is about 5% of sales, its impact in net sales should be less than 0.5%. The key? The company enjoys a strong international presence, with products sold in more than 150 countries, and overseas operations contributing to over one-half of revenues.

Agilent: Spinoff coming up
Second, we have Agilent Technologies (NYSE: A  ) , a broad-based manufacturer of test and measurement equipment.

The company posted weak results for its fourth quarter. Revenue dropped 2.85% to $1.72 billion compared to the prior-year quarter. Asia/Pacific and U.S. markets softened, while Europe grew 7.6% year over year.

Just like PerkinElmer, Agilent has made strategic changes as well, refocusing on life sciences, genomics, diagnostics, and wireless test markets. This shift has come mostly through a few important acquisitions, wage cuts, and the shutdown or sale of significant portions of its non-core businesses.

Most recently, Agilent spun off its electronic measurement business as a separate publicly traded company. The operation is expected to be completed in about one year, generating a company with $2.9 billion in annual sales.

These initiatives are proving successful, as the steady expansion of Agilent's operating margin over the last seven quarters reveals. Not bad at all.

The company's presence in the U.S. academic market is lower than its peers, which is an extra positive. However, Agilent is experiencing persistent weakness in several end markets where the overall economy's still struggling. Moreover, the unfortunate loss of a major handset manufacturing test customer does not help its situation. 

Thermo Fisher Scientific: Promising acquisition
Finally, we have Thermo Fisher Scientific (NYSE: TMO  ) , a specialist in serving science by providing analytical technologies, and diagnostics and laboratory products.

The third quarter was better than expected for Thermo Fisher, with revenue increasing 3% year over year to $3.19 billion, hitting a record for the quarter.

Thermo Fisher is taking over Life Technologies, which will complement its own  portfolio of analytical technologies and specialty diagnostics. This $13.6 billion acquisition should be completed in early 2014, creating an unrivaled market leader serving research, specialty diagnostics, and applied markets.

The company's international operations are also encouraging, with consistent growth in emerging markets and especially in the Asia-Pacific region. For eight straight quarters now, Thermo Fisher's enjoyed 20% organic growth in China. In response to this trend, Thermo Fisher launched a $9.5 million innovation center in Shanghai this past June.

However, the company's U.S.-based academic and government customers represent 15% of its sales, so expect the sequester to sink its teeth into Thermo Fisher to some degree.

Bottom line
PerkinElmer seems to be on the right track, with a good business reorientation and improvements in its margins. Long-term prospects are encouraging.

Thinking mid-term, Agilent's spinoff is a positive move, since both businesses are distinct and hold limited synergies. A sole focus on life sciences and diagnostics will improve its position.

Thermo Fisher's acquisition is very encouraging in terms of market share positioning, and as a future driver for profits. However, since the company sells scientific instruments that are not life-sustaining in nature, global economic uncertainty could reduce sales, especially considering its exposure to government cuts.


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