Life sciences and medical diagnostics company Danaher (DHR) reported better-than-expected earnings and revenue for the fourth quarter. We view the dip in the stock as unjustified and an opportunity. Revenue increased nearly 10% on a core basis to $8.37 billion, well above estimates of $7.9 billion, according to Refinitiv. Adjusted profit increased 6.7% to $2.87 per share, exceeding the consensus estimate of $2.54 per share. When excluding the impact of declining Covid testing sales — but keeping in revenue from products that support vaccines and therapeutics — Danaher’s base business saw core growth of 7.5%. That shows the company isn’t overly reliant on the bump in pandemic sales. Bottom line This was a solid quarter from one of the best-run companies in the world. With very little to nitpick, we attribute Tuesday’s 3% stock decline to a combination of management already preannouncing the results and shares making a large move into the print. Also to blame: first-quarter guidance may be a tad light versus expectations. Given in-line to better-than-expected quarterly results pretty much across the board along with operating margin expansion and strong cash flow generation, we’re inclined to view Tuesday’s selloff as a buying opportunity as noted by our 1 rating — especially considering that the full-year guide is also in-line to better-than-expected. DHR 1Y mountain Danaher (DHR) 1-year performance Management said on the post-earnings call that the first quarter is expected to be the low point for their bioprocessing non-Covid core growth as customers work to repurpose existing inventories. In other words, that bioprocessing inventory glut that’s pressured the life sciences industry in recent months appears to be coming to an end, at which point growth stands to reaccelerate. Guidance Management expects overall core revenue growth to be down mid-single-digits on a percentage for the first quarter. After adjusting for an expected “high-single to low-double-digit” impact related to Covid testing, vaccine, and therapeutics sales, the team is forecasting base business core revenue growth to be in the mid-single-digit percent range. The operating profit margin is expected to be roughly 30% — ahead of the 27.7% expected. For the full year 2023, management expects overall core revenue growth to be down mid-single-digits. After adjusting for an expected “low-double-digit” impact related to Covid testing, vaccine, and therapeutics sales, the team is forecasting base business core revenue growth to be in the high-single-digit range. The operating profit margin is expected to be roughly 31% — ahead of the 27.3% expected. Though we don’t have an exact comparison because of the change in how management is calculating growth going forward (more details on that below), the first quarter guide appears to be a bit light of what some analysts were modeling and likely the cause of at least some of Tuesday’s selling pressure. The full-year guidance, however, appears to be in-line to slightly better than analysts were expecting. On the call, management said they now anticipate Covid-related vaccine and therapeutic revenue will be “approximately $150 million for the full year of 2023, down from approximately $810 million in 2022 and lower than our previous expectation of $500 million.” The reasons: lower vaccination and booster rates along with the availability of alternative therapeutics (other than monoclonal antibody-based treatments). Reporting Structure Before digging into the results, we want to highlight that management has slightly modified Danaher’s reporting structure. As a result of significant growth in Life Sciences in recent years, the team has opted to separate out a portion of the original segment into a new segment called Biotechnology. In order to provide an apples-to-apples comparison to Wall Street estimates, we combined the sales and operating income of the new Biotechnology and Life Sciences segments in the table below in the Product Segments section. Additionally, starting with the first quarter 2023 results, management is updating its base business core revenue growth definition to exclude the impact of Covid-related testing and the impact of Covid vaccine and therapeutic revenue streams. This is reflected in the guidance section provided above. Previously, only revenues related to Covid testing were excluded. On the call, management pointed to roughly 10% core revenue growth in both North America and Europe. In China, a surge of infections as the Chinese government did away with its zero Covid policy hampered performance in the company’s clinical diagnostics business there as patient and testing volumes declined. This dynamic is expected to last through the first quarter before “gradually recovering through the balance of the year.” Additionally, the team attributed Danaher’s profit margin expansion to “disciplined cost management, productivity measures and price actions implemented to help offset the impact of inflationary pressures across [the] business.” Management also noted that while supply chain issues remain, they are seeing “modest improvement in component availability.” It’s also worth noting that Environmental & Applied Solutions (EAS) revenue was up 5.5% on a core basis driven by high-single-digit growth in Water Quality related sales. (These figures are not in the table.) The EAS division is expected to become a separate company later this year. 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Life sciences and medical diagnostics company Danaher (DHR) reported better-than-expected earnings and revenue for the fourth quarter. We view the dip in the stock as unjustified and an opportunity.
