JP Morgan remains Overweight due to Thermo Fisher(TMO)'s strong Q2 results

(1) Thermo Fisher (TMO) reported its 2Q22 results, with revenues of $10.97B (vs. Street of $9.97B), representing +3% organic growth. Core organic growth (includes COVID vax/therapies) was +13% (vs. +16% in 1Q22) while COVID-19 testing revenue of $630M was above expectations of $225M.

(2) By segment, LSS organic growth declined -by 5% (led by bioproduction and bioscience, offset by genetic sciences due to lower testing volumes), SDS -by 8% organic (strong underlying growth in immunodx and microbiology, offset by COVID roll-off), LPS +10% organic (on continued PPD strength and growth in research and safety channels) and AI +13% organic (driven by electron microscopy, chromatography, and MS).

PPD continues to perform above expectations, driving $1.72B of revenue during 2Q on broad-based strength across different customer types. As a result of the continued outperformance, management lifted PPD expectations again by ~$100M to $6.8B (vs. $6.7B prior). This represents +12% organic growth for the year (vs. +11% prior), and well above initial expectations of +HSD. Regarding profitability, TMO now anticipates >$2.00 EPS contribution from PPD (vs. $1.98 prior).

While the macro environment had become increasingly complex, TMO has realized pricing increases >2x the high end of the normal 0.5-1% range. China was a bright spot for the quarter as TMO grew >20% in the region despite the lockdowns, which offset the expected ~200 bps headwind to core organic growth. Management noted that China's strength stemmed from the core business but also COVID testing, and the management team sounded confident in China's growth in 2H but acknowledged there will likely be continued COVID disruptions.

TMO continues to drive share gains across the portfolio, and manage margins despite the macro backdrop. JP Morgan continues to believe TMO can drive peer-high LT growth and continue to execute on M&A, as seen with PPD’s multiple substantial beats and raises. As such, JP Morgan remains Overweight while rolling its Dec 2022 PT of $700 to a Dec 2023 PT of $715.