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Danaher (DHR) Down 1.9% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

It has been about a month since the last earnings report for Danaher (DHR). Shares have lost about 1.9% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Danaher due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Danaher Beats on Q2 Earnings and Sales, Ups Guidance

Danaher reported better-than-expected results in the second quarter of 2019. While earnings beat the Zacks Consensus Estimate by 3.5%, sales surpassed the same by 1.4%.

The company's adjusted earnings were $1.19 per share in the reported quarter, which outpaced the Zacks Consensus Estimate of $1.15. The reported figure also increased 3.5% over the year-ago quarter's figure of $1.15 on the back of impressive sales performance and gain from DBS initiatives.

Organic Growth & Acquired Assets Drive Sales

In the quarter under review, the company's net sales were $5,156.6 million, which increased 3.5% from the year-ago quarter’s figure. Organic sales in the quarter grew 5.5% and acquired assets had a positive 1% impact. However, foreign currency translations had a negative impact of 3%.

The top line surpassed the Zacks Consensus Estimate of $5,085 million.

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 totaled $1,712.6 million, increasing 6.5% year over year. Results were driven by a 2% gain from acquired assets and 7.5% growth in core sales, partially offset by a 3% adverse impact of foreign currency translations.

Revenues in the Diagnostics segment grossed $1,618.3 million, increasing 4.5% year over year. The improvement came on the back of a 7.5% increase in core sales, which was partially offset by a 3% negative impact of foreign currency translations.

Revenues in the Dental segment amounted to $712.1 million, reflecting 3% decline year over year. Core sales declined 0.5% and unfavorable movements in foreign currencies had 2.5% adverse impact.

Notably, in June 2019, Danaher announced that its spun-off Dental segment will be known as Envista Holdings Corporation. The separation of the dental business will be complete in the second half of 2019.

Revenues in the Environmental & Applied Solutions segment totaled $1,113.6 million, increasing 2% year over year. The uptick can be attributed to a 4% increase in core sales and 0.5% positive impact of acquired assets. However, foreign currency translations had an adverse impact of 2.5%.

Margins Fall Year Over Year

In the quarter under review, Danaher's cost of sales increased 5.3% year over year to $2,279.2 million. It represented 44.2% of net sales compared with 43.4% in the year-ago quarter. Gross margin declined 80 basis points (bps) year over year to 55.8%.

Selling, general and administrative expenses of $1,671.8 million reflect a year-over-year increase of 2.1%. As a percentage of net sales, it represented 32.4% versus 32.9% in the year-ago quarter. Research and development expenses were $321.8 million, which increased 3.2% year over year. It represented 6.2% of net sales.

Operating income in the quarter under review increased 1.9% year over year to $883.8 million. Operating margin, however, contracted 30 bps to 17.1% in the quarter. This downturn was due to a 5-bps adverse impact of acquisitions and 40-bps impact of miscellaneous sources, partially offsetting contribution of 15 bps from the core business.

Balance Sheet and Cash Flow

Exiting the second quarter, Danaher had cash and cash equivalents of $5,433.6 million, significantly above $3,910 million at the end of the last reported quarter. Long-term debt balance increased 7.3% sequentially to $10,144.4 million.

In the second quarter, the company generated net cash of $1,171.5 million from operating activities, increasing 13.1% from the year-ago period's level. Capital used for purchasing property, plant and equipment totaled $180.8 million versus $153.8 million in the year-ago quarter. Free cash flow increased 13.5% year over year to $1,002 million.

In the first half of 2019, the company paid dividends worth $233.9 million to its shareholders.

Outlook

In the quarters ahead, Danaher expects to consistently benefit from DBS initiatives. These efforts enabled the company to focus more on product innovation, superior product quality, building an efficient workforce and enhancing shareholder value.  Also, Danaher anticipates completing the acquisition of General Electric Company's BioPharma business in the fourth quarter of 2019. This buyout will strengthen Danaher's biologics workflow solutions business, considered under its Life Sciences segment.

For the third quarter, Danaher anticipates adjusted earnings of $1.12-$1.15 per share.

For 2019, the company raised its adjusted earnings per share projection to $4.75-$4.80 from $4.72-$4.80 mentioned earlier.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a flat path over the past two months.

VGM Scores

Currently, Danaher has a nice Growth Score of B, a grade with the same score on the momentum front. However, 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.

Outlook

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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