It has been about a month since the last earnings report for Danaher (DHR). Shares have added about 3.4% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Danaher due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Danaher Q1 Earnings Top, View Down on Buyout Impact
Danaher kept the earnings streak alive in the first quarter of 2019, wherein earnings beat estimates by 5.9%. Also, sales beat of 1.8% was recorded in the quarter.
The company's adjusted earnings were $1.07 per share in the reported quarter, surpassing the Zacks Consensus Estimate of $1.01. Also, the quarterly results increased 8.1% over the year-ago quarter’s figure of 99 cents on the back of sales growth and gain from DBS initiatives.
Gains From Acquired Assets and Organic Growth Drive Revenues
In the quarter under review, the company's net sales were $4,879.9 million, increasing 3.9% from the year-ago quarter’s figure. Organic sales in the quarter grew 5.5% and acquired assets had a positive 2.5% impact. However, foreign currency translations had a negative impact of 4%.
The top line surpassed the Zacks Consensus Estimate of $4,792 million by 1.8%.
The company reports net sales under four segments — Life Sciences, Diagnostics, Dental, and Environmental & Applied Solutions. The segmental information is briefly discussed below:
Revenues in the Life Sciences segment were $1,626.9 million, increasing 10% year over year. Results were driven by 7% gain from acquired assets and 7% growth in core sales, partially offset by 4% adverse impact of foreign currency translations.
Revenues in Diagnostics totaled $1,536.8 million, increasing 1% year over year. The improvement came on the back of 5% increase in core sales, which was partially offset by 4% negative impact of foreign currency translations.
Revenues in the Dental segment totaled $659.7 million, reflecting year-over-year decline of 2%. Core sales growth of 2.5% was more than offset by 4.5% adverse impact of unfavorable movements in foreign currencies.
It is worth mentioning here that Danaher intends to spin-off the Dental segment into an independent publicly-trading company — DentalCo — by the second half of 2019.
Revenues from Environmental & Applied Solutions totaled $1,056.5 million, increasing 3% year over year. The improvement came on the back of 5.5% increase in core sales and 1% positive impact of acquired assets. However, foreign currency translations had an adverse impact of 3.5%.
Margins Fall Year Over Year
In the quarter under review, Danaher's cost of sales increased 5.4% year over year to $2,161.6 million. It represented 44.3% of net sales compared with 43.7% in the year-ago quarter. Gross margin declined 60 basis points (bps) year over year to 55.7%.
Selling, general and administrative expenses of $1,683.4 million reflect year-over-year increase of 5.1%. As a percentage of net sales, it represented 34.5% versus 34.1% in the year-ago quarter. Research and development expenses were $310.8 million, up 4.1% year over year. It represented 6.4% of net sales.
Operating income in the quarter under review decreased 2.6% year over year to $723.8 million. Operating margin, however, declined 100 bps to 14.8% in the quarter. This fall was due to a 10-bps adverse impact of acquisitions and 130-bps impact of miscellaneous sources, partially offsetting contribution of 40 bps from the core business.
Balance Sheet and Cash Flow
Exiting the first quarter, Danaher had cash and cash equivalents of $3,910 million, significantly above $787.8 million at the end of the last reported quarter. Long-term debt balance declined 2.4% sequentially to $9,458.2 million.
In the first quarter, the company generated net cash of $703.3 million from operating activities, decreasing 15% from the year-ago period's level. Capital used for purchasing property, plant and equipment totaled $155.7 million versus $137.9 million in the year-ago quarter. Free cash flow decreased 20.5% year over year to $548.4 million.
Danaher paid dividends worth $112.2 million to shareholders in the first quarter.
In the quarters ahead, Danaher expects to continue realizing gains from DBS initiatives. These efforts enabled the company to focus more on product innovation, superior product quality, building efficient workforce and enhancing shareholder value. Also, after the completion in the fourth quarter of 2019, the acquisition of General Electric Company's BioPharma business will strengthen biologics workflow solutions of the Life Sciences segment.
For the second quarter of 2019, Danaher anticipates adjusted earnings of $1.13-$1.16 per share. Core sales are predicted to grow 4-5%.
For the year, the company lowered adjusted earnings per share projection to $4.72-$4.80 from $4.75-$4.85 mentioned earlier. The revision is done mainly to adjust the dilution caused by Danaher's offerings of common shares to fund the acquisition of the BioPharma business.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
At this time, Danaher has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Danaher has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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