We issued an updated research report on Danaher Corporation DHR on Jun 14.
This conglomerate currently carries a Zacks Rank #3 (Hold) and has a market capitalization of approximately $100 billion.
A few growth drivers and certain headwinds, which might influence Danaher, have been discussed below.
Factors Favoring the Company
Share Price Performance, Earnings Projections for Q2: Market sentiments seem to be working in favor of Danaher over time. In the past three months, the company’s share price has gained 9.1% against the industry’s decline of 0.1%.
We believe that impressive financial results helped in driving sentiments for the stock. In the last reported quarter (first-quarter 2019), Danaher recorded positive earnings surprise of 5.94%. The company’s average earnings surprise for the last four quarters is a positive 3.76%. Its share price has increased 10.1% since the release of the results on Apr 18.
Danaher anticipates gaining from its efforts to build superior product quality, creating efficient workforce, product innovation and enhancing shareholder value. In the second quarter of 2019, earnings are predicted to be $1.13-$1.16 per share, above 99 cents recorded in the year-ago quarter.
Solid Product Demand Aiding Top Line: Danaher’s top line in the first quarter of 2019 improved 3.9% year over year on buyouts and organic sales. In the quarters ahead, the company anticipates gaining from products — including Beckman sample preparation platform, Biomek i Series, iCELLis bioreactor system, THUNDER Imaging Systems, DxH 520 analyzer and DxA 5000.
In the second quarter of 2019, Danaher’s organic sales are predicted to grow 4-5%.
Capital Allocation: The company effectively uses capital for making acquisitions, growth investments and rewarding shareholders handsomely. Integrated DNA Technologies, acquired in April 2018, has been strengthening Danaher’s Life Sciences segment while Blue Software (acquired in July 2018) added vigor to packaging development and production workflow.
In January 2019, the company acquired Labcyte Corporation while it agreed to buy General Electric Company's GE BioPharma business. When completed, the acquired assets will complement Danaher’s biologics workflow solutions of the Life Sciences segment. Also, the company planned to divest the dental business to an independent publicly-trading company in the best interest of shareholders.
Danaher rewards its shareholders through dividend payments. In first-quarter 2019, it used approximately $112.2 million for paying dividends, reflecting 15.1% growth over the year-ago quarter. Quarterly dividend rate was hiked 6% in March 2019.
Factors Working Against the Company
Valuation and Lowered Earnings Estimates: Danaher’s shares currently seem overvalued compared with the industry it belongs. Its price/earnings multiple, in the past three months, of 30.35 is higher than the industry’s 20.35 multiple. Notably, this metric is trading higher than the industry’s three-month highest level of 21.27. This makes us cautious about the stock.
For 2019, the company lowered adjusted earnings per share guidance from $4.75-$4.85 to $4.72-$4.80. The revision takes into account the dilution caused by issuance of common and preferred shares to fund the BioPharma business.
Also, earnings estimates for the company have been lowered in the past couple of months. The Zacks Consensus Estimate is currently pegged at $4.77 for 2019, reflecting decline of 0.2% from the 60-days-ago figure.
Danaher Corporation Price and Consensus
Danaher Corporation price-consensus-chart | Danaher Corporation Quote
High Costs: The company has been suffering from risks arising from higher costs and expenses. In the first quarter of 2019, its cost of sales increased 5.4% year over year while its selling, general and administrative, and research and development expenses increased 5.1% and 4.1%, respectively. High costs and expenses, if uncontrolled, might be detrimental to margins.
Forex Woes: Geographical diversification is reflective of a flourishing business of the company. However, this diversity exposed it to headwinds arising from geopolitical issues and unfavorable movements in foreign currencies. In the first quarter of 2019, forex woes adversely impacted its sales growth by 2%. Persistence of such issues might be concerning for the company.
Stocks to Consider
Two better-ranked stocks in the industry are Carlisle Companies Incorporated CSL and Honeywell International Inc. HON. While Carlisle Companies currently sports a Zacks Rank #1 (Strong Buy), Honeywell carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
In the past 60 days, earnings estimates for the two stocks have improved for the current year. Further, average earnings surprise for the last four quarters was positive 19.07% for Carlisle Companies and 3.50% for Honeywell.
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