Shares
Danaher shares hit a 1-year high after earnings and we’re increasing our price target
January 30, 2024
0 7 minutes read
Danaher on Tuesday morning reported fourth-quarter beats on the top and bottom lines, driven by better-than-expected results in all key operating segments. The sales results were consistent with its positive pre-announcement earlier this month. While guidance appears light, we think there’s a good deal of conservatism at play here, given management’s tone on the call and what we’ve heard from other players with similar end-market exposure . Wall Street seems to agree as shares were initially down a few percentage points after the release in the premarket but quickly about faced jumped higher as the call got underway. Revenue for the period ended Dec. 31 declined 11.5% organically year over year to nearly $6.41 billion in total sales, outpacing analyst estimates of $6.12 billion, according to LSEG. Total sales on a reported basis dropped just over 10%. When excluding a 7% headwind relating to Covid-related tests and products, Danaher’s base business sales were down 4.5% versus the year ago period. Adjusted earnings-per-share (EPS) decreased 17.7% annually to $2.09, ahead of the consensus estimate of $1.91 per share, LSEG data showed. DHR 1Y mountain Danaher 1 year Shares of Danaher rose as much as 5% to a 52-week high of $245.40 each. That puts the stock firmly in the green for 2024 and extends to 34% its increase since hitting a 52-week low on Oct. 30, 2023. Bottom line It was a strong quarter from Danaher to close out 2023. Though guidance came up short, we think management is looking to under-promise so that they can over-deliver. It’s a smart move given how uncertain the bioprocessing market recovery has been thus far. The directional commentary is what we think members need to focus on and why the stock reversed. The team may not be seeing a broad-based inflection in bioprocessing just yet, but that’s what provides the opportunity. By the time they say they have seen the inflection point, the easier money will have already been made on the stock. In terms of geography, China is expected to remain a key source of weakness throughout the year. However, the rest of the world is expected to return to growth in the second half of the year as the destocking process completes. Destocking happens when customers pull back on orders in order to flush out excess inventory. The team also noted that they’re not modeling a book-to-bill in bioprocessing of greater than 1 all year, though it is expected to get “pretty close in the second half. That’s in contrast to peers that have already seen their own book-to-bill ratios exceed 1. Book-to-bill is a ratio that measures the amount of business booked, versus the amount billed, a ratio greater than 1 is favorable because it means that demand is exceeding supply and resulting in backlog growth. There could, of course, be many reasons for the divergence, such as the customer base and sales mix. But we think management is being cautious because the backlog is already at 2018/2019 levels. We don’t see a reason for the backlog to drop below and sustain below that level given the positive commentary we heard on the processing end market as it relates to biologic and genomic medicines in the development pipeline. This conservative view is also similar to what Danaher shared at the JPMorgan Healthcare conference earlier this month. The sellers of Danaher shares premarket clearly didn’t listen to management’s presentation. If they did, they would’ve known not to expect a bullish guide Tuesday morning. But as the sellers cleared out, buyers swooped in and bought the stock because they can see the light at the end of the tunnel. When pressed during the question-and-answer session of the post-earnings call, the team noted that bioprocessing activity remains “along the long-term growth rate … [and] continues to be strong.” That’s important because it means inventories are indeed being worked down at a solid pace. Add in that the team has seen a “historic level of both approvals as well as number of projects in the biologic development pipeline,” and we think it all supports a conservative guide and a favorable path ahead as we work through 2024. Don’t forget, Federal Reserve interest rate cuts, which are expected later this year, should help with funding in early-stage biotech. With end market dynamics set to improve throughout the year, and management guiding for an operating profit margin expansion, we are reiterating our buy-equivalent 1 rating on the stock and nudging up our price target to $260 per share from $250. Guidance Starting with the current quarter (the first of fiscal 2024), the team sees a high single-digit core revenue decline on a percentage basis – greater than the 4.1% decline expected, according to FactSet. Contributing to that forecast are expectations for a “low 20s” decline in Biotechnology, the segment that houses bioprocessing, and a mid-single-digit decline in Life Sciences. Those were light. A low single-digit increase forecast in Diagnostics looks better than expected. The adjusted operating profit margin is expected to be about 28% — below the 29.1% expected. While the near-term outlook isn’t great, management is clearly anticipating sequential improvement throughout the year. As a result, on a full-year basis , management sees total sales declining low single digits on a core basis. This compares to an expectation for a 0.5% annual decline. Baked into this view is an expected Biotechnology decline of low- to mid-single digits (up 0.6% expected), Life Sciences to be down low-single digits (up 4.1% expected), and Diagnostics to advance low-single digits (down 2.4% expected). Within Biotechnology, management said that bioprocessing revenue is expected to be down mid- to high-teens on a percentage basis in the first half of the year, with core growth expected to exit the year at rate of high-single digits or better. Full-year adjusted operating margin is expected to expand by about 50 bps versus the 2023 level, implying a margin of about 29.2%. While below the 29.6% the Street is modeling, we again think the team is being highly conservative. Quarterly commentary On the earnings conference call with analysts and investors, management noted that core revenue was down low-double digits in developed markets, and down high-single digits in high-growth markets, which included a mid-teen decline in China “where the economic landscape remains challenging.” As seen in the Product Segments section of the earnings table above, all operating units delivered better-than-expected sales and adjusted operating income. Biotechnology sales fell nearly 21% to $1.76 billion in the fourth quarter. Core sales, not shown on the table, were down 22.5%. Management said bioprocessing sales, which have been a problem area all year due to elevated inventory levels, was down over 20% on a core basis, with revenue and order trends “largely consistent” with what was seen in the third quarter of 2023. That said, they quickly noted that they are seeing a “modest sequential improvement” in the current (first) quarter “with some of our customers returning to normal ordering patterns.” The team said they “haven’t yet seen a broad-based inflection in demand” as customers in North America and Europe are still working through inventory on hand, while China remains weak, causing customers in the Asia-Pacific region to conserve capital. Fortunately, as noted above, the bioprocessing business is expected to improve as the year progresses. Long-term, management remains confident in the bioprocessing market opportunity noting that “2023 was another record year of FDA approvals for biologic and genomic medicines, and the development pipeline is meaningfully higher than at any point in history.” Life Sciences sales in Q4 dipped less than 1% to $1.93 billion. Core sales were down 4% year over year as strength from academic and life science research customers was more than offset by weakness from pharma and biopharma customers. Diagnostics sales for the quarter dropped 8.4% to $2.72 billion. Core sales fell about the same as strength in clinical diagnostics, driven by Beckman Coulter Diagnostics was more than offset by lower respiratory revenue at Cepheid. The team did note, “Annual respiratory revenue in a typical respiratory season will be approximately $1.5 billion.” That’s above their prior assumption of $1.2 billion due to an expectation for increased volumes and more favorable mix of Danaher’s 4-in-1 test, which screens for Covid, Flu A, Flu B, and RSV (respiratory syncytial virus). Free cash flow came up a bit short of expectations at $1.16 billion, down 38% from the year-ago period. However, Danaher has achieved a full-year free cash flow to net income conversion ratio of more than 120%. Earnings backed by cash are considered to be of higher quality — so we certainly like this dynamic, even if the current (first) quarter’s results came up short. (Jim Cramer’s Charitable Trust is long DHR. See here for a full list of the 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 sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
In this photo illustration, Danaher Corporation logo is seen displayed on a smartphone and PC screen.
Pavlo Gonchar | SOPA Images | LightRocket | Getty Images
Danaher on Tuesday morning reported fourth-quarter beats on the top and bottom lines, driven by better-than-expected results in all key operating segments. The sales results were consistent with its positive pre-announcement earlier this month.
January 30, 2024
0 7 minutes read
