Danaher shares jump 7% as the turnaround in biotech finally arrives
Shares of Danaher popped more than 7% on Tuesday after the life sciences company delivered beats across its three main businesses — a sign the long-awaited turnaround in the biotech industry is finally here. Revenue for the period ended March 29 declined 4% organically year over year to nearly $5.8 billion in total sales, outpacing analyst estimates of $5.62 billion, according to LSEG. Total sales on a reported basis dropped nearly 2.6% year-over-year. Adjusted earnings-per-share (EPS) decreased 6.3% annually to $1.92, ahead of the consensus estimate of $1.71 per share, LSEG data showed. Danaher Why we own it : Danaher is a best-in-class life sciences and diagnostics company, with a management team who have proven time and again their ability to find new ways to grow. We expect to see a turn in bioprocessing-related orders this year as biotech funding comes back online and larger customers wind down efforts to flush out excess Covid-era inventory. Competitors : Sartorius and Thermo Fisher Scientific Weight in portfolio : 4.6% Most recent buy : Oct. 24, 2023 Initiated : Jan. 3, 2022 Bottom line A slowdown in biotech industry funding as larger customers work through excess inventory has weighed on Danaher shares for several quarters. The turnaround is now in effect, with bioprocessing orders up on a sequential basis. This led to a first-quarter book-to-bill ratio of roughly 0.95. As a reminder, book to bill is a ratio that measures the amount of business booked, versus the amount billed, a ratio greater than one is favorable because it means that demand is exceeding supply and resulting in backlog growth. We’re just short of that level, but are heading in the right direction and directionality is what the Street is focused on. Given the improving order trends, we believe management is being conservative by affirming its full-year guidance. The company should be able to beat it. There are still headwinds. Core revenue was down slightly in developed markets, with broad-based strength in diagnostics offset by weakness in biotechnology. High growth markets, defined as “developing markets of the world experiencing extended periods of accelerated growth in gross domestic product and infrastructure,” also fell, a result that included a large decline in China, where management noted that the “economic landscape remains challenging.” But there was much more to like in this print. Strong headline results on the back of strength in all key operating segments, better-than-expected profit margin results, and strong cash generation metrics. Based on these results and the bottoming of the bioprocessing market, we are increasing our price target to $280 per share from $260. DHR YTD mountain Danaher YTD Guidance For the current quarter, the second of fiscal 2024, Danaher expects a mid-single-digit core revenue decline on a percentage basis – about in line with the 4.7% decline expected by analysts, according to Bloomberg. Contributing to that forecast are expectations for a low double-digit decline in biotechnology, the segment that houses bioprocessing, a mid-single-digit decline in life sciences, and a low single-digit decrease in diagnostics. Management’s operating profit margin forecast of about 26% is roughly in line with Street’s estimates of 26.5%, according to FactSet. On a full-year basis, management’s forecast was unchanged. The team expects total sales to decline by a percentage in the low single digits. This compares to expectations for a decline of 1.7% annually on the Street. Baked into this view is an expected biotechnology decline of low-to-mid-single digits, life sciences to be down low single digits, and diagnostics to advance low single digits — all unchanged from the previously provided outlook. Full-year adjusted operating margin of about 29% is expected by management, in line with analysts’ estimates. Quarterly results As seen in the product segments section below, all operating units delivered better-than-expected sales and adjusted operating income. Biotechnology sales fell nearly 17% on a core basis to $1.52 billion. Within the segment, bioprocessing sales fell a “high teens” percentage, while discovery and medical declined 20% year over year. As noted above, bioprocessing orders increased sequentially, leading to an improvement in the category’s book-to-bill ratio — a good sign since the company typically sees a seasonal order decline between the fourth and first quarter. In North America and Europe, Danaher’s larger customers are making steady progress working through their excess inventory with many returning to their regular order patterns. “We expect inventory levels that these customers have largely normalized exiting the second quarter, Blair said. “We are also encouraged by improvements in the overall funding environment. “While we don’t expect these improvements to impact order activity in the near term, it is a positive indicator for the long-term health of the bioprocessing market.” Management once again said the strong underlying trends in its end markets support growth in the biologics market at a high single-digit or better rate for the full year 2024. There is also an increasing number of therapies advancing through the development pipeline and reaching the market, the team said. Life sciences sales dipped less than 3% on a core basis to $1.75 billion. On the call, CEO Blair said that while pharmaceutical and biotech activity in developed markets was stable, albeit at lower levels of demand, the team saw some improvement as the quarter progressed, though that has not yet led to order growth. China remains a source of weakness due to lower demand and the lapping of stimulus programs from a year ago. Investments in innovation and key earlier acquisitions set the segment up for accelerated growth, Blair said. He added that high-margin recurring revenue now comprises more than 60% of the segment, which means more opportunities for margin improvement. Diagnostics sales advanced 7.5% on a core basis to $2.53 billion. Clinical diagnostics revenue rose at a rate in the mid-single digits, while subsidiary Beckman Coulter hit a growth rate in that same range for the fifth consecutive quarter. At subsidiary Cepheid, respiratory revenue of $675 million topped management’s expectation by $100 million, driven by both higher volumes and a favorable mix of its 4-in-1 test for Covid-19, Flu A, Flu B, and RSV. Blair said the company is “seeing better win and retention rates across the portfolio.” Free cash flow was better than expected at $1.45 billion, down 6% from a year ago. The company also achieved a free cash flow to net income conversion ratio of over 130%. That means its earnings are backed by cash and are therefore of a higher quality than profits without an equal or greater amount of cash in hand. (Jim Cramer’s Charitable Trust is long DHR. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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In this photo illustration, a Danaher Corporation logo seen displayed on a tablet.
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Shares of Danaher popped more than 7% on Tuesday after the life sciences company delivered beats across its three main businesses — a sign the long-awaited turnaround in the biotech industry is finally here.
