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Danaher (DHR) Down 3.5% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research
·6 min read

A month has gone by since the last earnings report for Danaher (DHR). Shares have lost about 3.5% in that time frame, underperforming 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 the most recent earnings report in order to get a better handle on the important catalysts.

Danaher Q3 Earnings Beat, Rise Y/Y on Sales Growth

Danaher has reported better-than-expected results for the third quarter of 2020, with earnings surpassing estimates by 25.5%. Also, the company’s sales surpassed the consensus estimate by 6.6%.

The company’s adjusted earnings were $1.72 per share in the reported quarter, which outpaced the Zacks Consensus Estimate of $1.37. The bottom line increased 62.3% from the year-ago quarter’s figure of $1.06 mainly on sales growth and improved operating margin.

Revenue Details

In the quarter under review, the company’s net sales were $5,883.2 million, reflecting year-over-year growth of 34.5%. The results were driven by solid performance in Life Sciences and Diagnostics segments.

Organic sales in the quarter increased 9% and foreign-currency translations had a positive impact of 1%. Also, acquisitions/divestments boosted sales by 24.5%. As noted, Cytiva had a 5% positive contribution on sales growth in the quarter. Organic sales, including the impact of Cytiva, increased 14% year over year.

Also, the company’s top line surpassed the Zacks Consensus Estimate of $5,520 million.

On a geographical basis, its sales increased 39.5% year over year to $2,379 million in North America, while the same expanded 43.9% to $1,374 million in Western Europe. Also, sales in high-growth markets were $1,803.6 million, up 26.3% year over year, and that in other developed markets increased 12.4% to $326.2 million.

It reports net sales under three segments — Life Sciences, Diagnostics, and Environmental & Applied Solutions. The segmental information is briefly discussed below:

Revenues for the Life Sciences segment totaled $2,922.5 million, rising 72.5% year over year. Acquisitions/divestments had a positive contribution of 63% to sales growth, while foreign-currency translations boosted sales by 1%. Core sales grew 8.5% year over year.

However, Cytiva had a positive impact of 10% and including this, organic sales in the quarter increased 18.5% year over year.

Revenues in the Diagnostics segment grossed $1,889.1 million, increasing 18% year over year. The improvement came on the back of a 17.5% rise in core sales and a 0.5% gain from foreign-currency translations.

Revenues in the Environmental & Applied Solutions segment totaled $1,071.6 million, decreasing 1% year over year. The decline was due to a 1% fall in core sales.

Margin Profile

In the quarter under review, Danaher’s cost of sales increased 37.2% year over year to $2,657.7 million. It represented 45.2% of net sales compared with 44.2% in the year-ago quarter. Gross profit increased 32.1% year over year to $3,225.5 million, while margin decreased 100 basis points (bps) year over year to 54.8%.

Selling, general and administrative expenses of $1,795.3 million reflect a year-over-year increase of 29.9%. As a percentage of net sales, it represented 30.5% versus 31.6% in the year-ago quarter. Research and development expenses were $342.6 million, which rose 21.2% year over year. It represented 5.8% of net sales versus 6.5% in the year-ago quarter.

Operating income in the quarter under review increased 40% year over year to $1,087.6 million. Operating margin increased 80 bps to 18.5% in the quarter. Interest expenses in the quarter totaled $76.7 million, higher than $24 million reported in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the third quarter, Danaher had cash and cash equivalents of $5,687.7 million, up 2.7% from $5,539.3 million at the end of the last reported quarter. Long-term debt balance decreased 2.5% sequentially to $21,806.1 million.

During the first three quarters of 2020, the company raised $7,691.3 million through borrowings, with a maturity of more than 90 days. It also repaid $5,000 million borrowings, with a maturity of more than 90 days.

In the third quarter of 2020, the company generated net cash of $1,722.7 million from operating activities, reflecting a year-over-year increase of 93%. Capital used for purchasing property, plant and equipment totaled $187.3 million versus $162.1 million in the year-ago comparable period. Free cash flow (non-GAAP) in the quarter improved 110% year over year to $1,536 million.

The company paid out dividends worth $445.4 million to its shareholders in the first three quarters of 2020, reflecting an increase of 15.7% from the year-ago period.



 

Outlook

In the quarters ahead, Danaher expects to benefit from a solid product portfolio, operational execution, dedicated workforce and a strong balance sheet.

For the fourth quarter, the company expects core revenue growth in high-single digits. In addition, it believes Cytiva’s impact on core sales will be 300-400 bps and including this contribution, core sales growth in the quarter will be in low-double digits.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review. The consensus estimate has shifted 14.25% due to these changes.

VGM Scores

Currently, Danaher has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Danaher has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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