Shares of Danaher rose greater than 7% on Tuesday after the life sciences company delivered positive results across its three essential businesses, an indication that the biotech industry’s long-awaited turnaround is finally here. According to LSEG, sales for the period ended March 29 fell 4% organically year-over-year to total sales of nearly $5.8 billion, beating analyst estimates of $5.62 billion. Total sales fell nearly 2.6% year-over-year on a reported basis. Adjusted earnings per share (EPS) fell 6.3% annually to $1.92, above the consensus estimate of $1.71 per share, LSEG data showed. Danaher Why We Own the Company: Danaher is a world-class life sciences and diagnostics company with a management team that has consistently demonstrated its ability to search out latest avenues for growth. We expect there can be a turnaround in bioprocessing orders this yr as biotech funding picks up and bigger customers wind down efforts to clear Covid-era excess inventory. Competitors: Sartorius and Thermo Fisher Scientific Weight in Portfolio: 4.6% Last Purchased: October 24, 2023 Initiated: January 3, 2022 Bottom Line: A slowdown in biotech industry funding as larger customers work through excess inventory has hit shares of Danaher burdens several neighborhoods. The turnaround is now in effect and bioprocessing orders are increasing sequentially. This resulted in a book-to-bill ratio of around 0.95 in the primary quarter. As a reminder, Book to Bill is a ratio that measures the quantity of business booked in comparison with the quantity invoiced. A ratio greater than one is favorable since it means demand exceeds supply and ends in a rise within the order backlog. We narrowly missed that level but are on the fitting track and directional bias is what the Street is targeted on. Given the improving order situation, we assume that management will act conservatively and ensure its forecast for the total yr. The company should have the opportunity to beat it. There are still headwinds. Core sales fell barely in developed markets, with overall strength in diagnostics offset by weakness in biotechnology. High-growth markets, defined as “developing markets of the world that experience extended periods of accelerated growth in gross domestic product and infrastructure,” also declined, including a pointy decline in China, where management noted that “the economic landscape remains challenging.” “But there was much more to this pressure. Strong overall results driven by strength in all key operating segments, better-than-expected margin results and strong cash generation metrics. Based on these results and the bottoming in the bioprocessing market, we are increasing our price target to $260 Dollars to $280 per share. DHR YTD Mountain Danaher YTD Guidance For the current quarter, the second of fiscal 2024, Danaher expects a mid-single-digit percentage decline in core sales – roughly the decline of 4% expected by analysts, according to Bloomberg .7% is supported by expectations of a low double-digit decline in biotechnology, the segment that includes bioprocessing, a mid-single-digit decline in life sciences and a low-single-digit decline in diagnostics Management’s forecast operating profit margin of about 26% is roughly in line with Street estimates of 26.5%, according to FactSet. On a full-year basis, management’s forecast remained unchanged. The team expects total sales to decline by a low single-digit percentage. This compares to expectations of a 1.7% annual decline on the Street. This assessment is based on an expected low- to mid-single-digit decline in biotech, a low-single-digit decline in life sciences, and a low-single-digit increase in diagnostics – all unchanged from the previously provided forecast. In line with analyst estimates, management expects a full-year adjusted operating margin of approximately 29%. Quarterly Results As can be seen in the Product Segments section below, all operating units delivered better than expected sales and adjusted operating results. Biotechnology revenue fell nearly 17% on a core basis to $1.52 billion. Within the segment, bioprocessing sales declined by a percentage in the high teens, while research and medical divisions declined 20% year-over-year. As noted above, bioprocessing orders increased sequentially, resulting in an improvement in the category’s book-to-bill ratio – a good sign since the company typically experiences a seasonal decline in orders between the fourth and first quarters. In North America and Europe, Danaher’s larger customers are making steady progress in reducing their excess inventory and many are returning to their regular ordering patterns. “We expect these customers’ inventories to have largely normalized after the second quarter,” Blair said. “We are also encouraged by improvements in the overall financing environment.” “While we do not expect these improvements to impact order activity in the near term, this is a positive indicator of the long-term health of the bioprocessing market.” Management again said the strong underlying trends in its end markets support high-single-digit biologics market growth or better for full-year 2024. Additionally, more and more therapies are progressing through the development pipeline and reaching the market, the team said. Life sciences revenue fell less than 3% on a core basis to $1.75 billion. CEO Blair said on the call that while pharma and biotech activity in developed markets was stable, albeit with lower demand, the team saw some improvement during the quarter, but that did not yet translate into order growth have. China remains a source of weakness due to lower demand and the expiration of stimulus programs a year ago. Investments in innovation and key prior acquisitions are preparing the segment for accelerated growth, Blair said. He added that high-margin recurring revenue now accounts for more than 60% of the segment, meaning more opportunities for margin improvement. Diagnostics revenue increased 7.5% on a core basis to $2.53 billion. Sales in clinical diagnostics increased in the mid-single digits, while subsidiary Beckman Coulter achieved its fifth consecutive quarter of growth in this area. At its Cepheid subsidiary, respiratory sales of $675 million exceeded management expectations by $100 million, reflecting both higher volumes and a favorable mix of the 4-in-1 Covid-19 test. 19, flu A, flu B and RSV. Blair said the company was seeing “improved win and retention rates across the portfolio.” Free cash flow was better than expected at $1.45 billion, down 6% from a year ago. The company also achieved a free cash flow to net income ratio of over 130%. This means that its earnings are backed by cash and are therefore of higher quality than earnings without an equal or larger cash holding. (Jim Cramer’s Charitable Trust is long DHR. A full list of stocks can be found here.) As a subscriber to 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 foundation’s portfolio. 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In this illustration, a Danaher Corporation logo is seen on a tablet.
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Shares of Danaher rose greater than 7% on Tuesday after the life sciences company delivered positive results across its three essential businesses, an indication that the biotech industry’s long-awaited turnaround is finally here.
