Danaher ( DHR ) delivered top- and bottom-line beats for the third quarter on Thursday. But shares of the life sciences and medical diagnostics company remain under pressure after management was forced to cut expectations for one of its key businesses. Revenue for the period ended Sept. 30 fell 11.5% organically over the year to $6.87 billion, beating analysts’ estimates of $6.63 billion, according to Refinitiv. Excluding an 8.5% headwind related to testing and Covid-related products, sales of Danaher’s core business were down 3% from the year-ago period. Adjusted earnings per share (EPS) fell 21% year over year to $2.02, beating the consensus estimate of $1.87 per share, Refinitiv data showed. Ultimately, the biggest drag on Danaher’s outlook remains its bioprocessing unit, a big part of the biotech segment, which hasn’t seen a shift in orders and is “kind of at the bottom here, bouncing around,” according to Chief Executive Rainer M. Blair . It doesn’t help that German rival Sartorius said last week that its biorefining orders jumped 15% sequentially in the third quarter. Bioprocessing is the process of creating products by using a living thing such as a cell or virus. (Think mold creates antibiotics.) Danaher does expect to see orders in this struggling business rebound in 2024. We used Tuesday’s selloff in Danaher stock to increase our position. Our take: Stocks tend to bottom out before their industrial cycle does, and Danaher has almost overcome the oversupply that is limiting demand for new orders. We believe it is wiser to buy now and be patient than to try to determine the exact moment when investors will start buying stocks again. The long-term positive trend for organic products remains intact. Results were mixed across the company’s other businesses. Sales of the diagnostics unit beat expectations, while life sciences fell short. Environmental and Applied Solutions results were also slightly better than expected, a positive sign for Veralto ( VLTO ), which was recently spun off from Danaher, but doing little for DHR stock. We continue to view this as a transition year for the company as it operates with excess inventory from the pandemic. We still believe in the strength of this management team. Once the bioprocessing glut is overcome, Danaher will be in a much stronger position. Consistent with our purchase of 30 shares of DHR on Tuesday, we reiterate our 1 rating and $250 price target. Guidance Management expects fourth-quarter overall underlying revenue growth to decline by percentage points in the high-teens. That seems a bit light compared to Street estimates. Driving that forecast is expecting biotech sales to decline in the 20% range, life sciences sales to decline by a mid-single-digit percentage point, and diagnostics to decline by about 20%. Adjusted operating profit margin is expected to be 28% – lower than the roughly 30% estimated on the Street. For the full year, excluding Veralto, management continues to expect total core revenue to decline by low double-digit percentage points. This also seems like a slight miss from expectations. Driving this forecast is the expectation that biotech sales will decline in the low-teens percentage range, life sciences sales will remain roughly flat (lower than the previously expected single-digit increase), and diagnostics will fall into the mid-teens percentage range. Adjusted operating profit margin is expected to be 29% — slightly better than the Street’s 28%. On the conference call with analysts and investors, management noted that underlying revenue declined in developed markets, led by a drop in revenue related to COVID, while revenue in high-growth markets declined by high single digits. China in particular saw a decline among teenagers, with the team citing the economic landscape as “challenging”. The sharp decline we saw in operating margin was due to lower biotech and diagnostics volumes, along with costs related to the Veralto spin-off completed on September 30. Although free cash flow came in slightly below expectations, Danaher achieved a year-to-date free cash flow-to-net income ratio of more than 120%. Cash-backed earnings are considered higher quality, so we certainly like that dynamic, even if slightly increased capital expenditures weighed on the third quarter result. Bioprocessing remains a tailwind. China saw a 45% drop in the quarter. Assuming no additional headwinds in the fourth quarter, management reiterated its full-year forecast for the core biorefining business to decline 10% on a full-year basis. In the longer term, management remains confident that global demand for biologics will continue to grow, saying that “more patients [are] use of biological drugs, [and] this year is on pace to be a record for FDA approvals of biologics, including approvals for important indications such as Alzheimer’s disease and several cancer immunotherapies. funding environment [in China] worsened further as the quarter progressed.” The team also posted that it expects the upcoming $5.7 billion acquisition of Abcam, a leading protein consumables maker, to be accretive on many levels, including earnings. (Jim Cramer Charitable Trust is long DHR. See here for a complete list of stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after a trade alert is sent before buying or sold a stock in his portfolio to a charitable trust. 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Jim Cramer on the NYSE June 30, 2022
Virginia Sherwood | CNBC
Danaher (DHR) scored hits on the top and bottom lines for the third quarter on Thursday. But shares of the life sciences and medical diagnostics company remain under pressure after management was forced to cut expectations for one of its key businesses.
- income for the period ended Sept. 30, fell 11.5% organically year over year to $6.87 billion, beating analysts’ estimates of $6.63 billion, according to Refinitiv. Excluding an 8.5% headwind related to testing and Covid-related products, sales of Danaher’s core business were down 3% from the year-ago period.
- Adjusted Earnings Per Share (EPS) fell 21% year-on-year to $2.02, ahead of the consensus estimate of $1.87 a share, Refinitiv data showed.
