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Why Is Danaher (DHR) Up 4.3% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Danaher (DHR). Shares have added about 4.3% in that time frame, underperforming 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 Beats on Q2 Earnings, Gives Impressive View

Danaher has kept its earnings streak alive in the second quarter of 2020. Its earnings surpassed estimates by 35.8% and sales exceeded the same by 6.7%.

The company’s adjusted earnings were $1.44 per share in the reported quarter, which outpaced the Zacks Consensus Estimate of $1.06. The same also grew 32.1% from the year-ago quarter’s figure of $1.09 mainly on sales growth.

Revenue Details

In the quarter under review, the company’s net sales were $5,297.4 million, reflecting year-over-year growth of 19.2%. Organic sales in the quarter declined 0.5% and foreign-currency translations had an adverse impact of 2%. On the other hand, acquisitions/divestments had a positive impact of 21.5% on sales.

As noted, Cytiva had a 4% positive contribution on sales growth in the quarter. Organic sales, including the impact of Cytiva, increased 3.5% year over year.

It is worth noting here that Danaher completed the acquisition of General Electric’s BioPharma business in first-quarter 2020. The acquired BioPharma business is included in Danaher’s Life Sciences segment and is called Cytiva.

Also, the company’s top line surpassed the Zacks Consensus Estimate of $4,963 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 $2,642.4 million, rising 54.5% year over year. Acquisitions/divestments had a positive contribution of 55.5% to sales growth, while forex woes had an adverse impact of 1%. Core sales were flat year over year.
 
However, Cytiva had a positive impact of 8% and including this, organic sales in the quarter increased 8% year over year.

Revenues in the Diagnostics segment grossed $1,660.2 million, increasing 2.5% year over year. The improvement came on the back of a 5% rise in core sales, which was partially offset by a 2.5% negative impact of foreign-currency translations.

Revenues in the Environmental & Applied Solutions segment totaled $994.8 million, decreasing 10.5% year over year. The decline was due to an 8.5% fall in core sales and a 2% adverse impact of foreign-currency translations.

Margin Profile

In the quarter under review, Danaher’s cost of sales increased 24.7% year over year to $2,444.8 million. It represented 46.2% of net sales compared with 44.1% in the year-ago quarter. Gross profit increased 14.8% year over year to $2,852.6 million, while margin decreased 210 basis points (bps) year over year to 53.8%.

Selling, general and administrative expenses of $1,685.4 million reflect a year-over-year increase of 21.3%. As a percentage of net sales, it represented 31.8% versus 31.3% in the year-ago quarter. Research and development expenses were $322.6 million, which rose 14.4% year over year. It represented 6.1% of net sales versus 6.3% in the year-ago quarter.

Operating income in the quarter under review increased 4.1% year over year to $844.6 million. Operating margin decreased 240 bps to 15.9% in the quarter. The results were adversely impacted by 80-bps adverse impact of core business and 400-bps impact of miscellaneous sources, partially offset by 240-bps contribution from acquisitions.

Interest expenses in the quarter totaled $78.6 million, higher than $19.7 million reported in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the second quarter, Danaher had cash and cash equivalents of $5,539.3 million, up 26.8% from $4,367.7 million at the end of the last reported quarter. Long-term debt balance decreased 1.6% sequentially to $22,370 million.

During the first half of 2020, the company raised $7,691.3 million through borrowings, with a maturity of more than 90 days. It also repaid $3,750 million borrowings, with a maturity of more than 90 days.

In the quarter, the company generated net cash of $1,445 million from operating activities, reflecting a year-over-year increase of 37%. Capital used for purchasing property, plant and equipment totaled $155.4 million versus $154.3 million in the year-ago quarter.
 
Free cash flow (non-GAAP) in the quarter improved 41% year over year to $1,289.9 million.

In the first half of 2020, the company paid out dividends worth $283.1 million to its shareholders.

Outlook

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

For the third quarter of 2020, the company expects core revenues growth in low-to mid-single digits. In addition, it believes that Cytiva’s impact on core sales will be 300-400 bps and including this contribution, core sales growth in the quarter will be in mid to high-single digits.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 7.54% due to these changes.

VGM Scores

Currently, Danaher has an average Growth Score of C, a grade with the same score on the momentum front. 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly 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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