We’re raising our price target on Danaher stock as it sheds a major overhang

Shares of Danaher popped more than 6% on Tuesday after the life sciences company delivered a strong quarter and reaffirmed its guidance — signaling the longtime Club stock is back on track. Revenue for the period ended June 28 declined 3.5% organically year over year to $5.74 billion, outpacing analyst estimates of $5.59 billion, according to LSEG. Total sales on a reported basis dropped nearly 2.9% year over year. Adjusted earnings per share (EPS) decreased less than 1% annually to $1.72, ahead of the consensus estimate of $1.57 per share. 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 : July 2, 2024 Initiated : Jan. 3, 2022 Bottom line This quarter was exactly what we needed to see from Danaher. In addition to strong performance at the companywide level — with profit margins and cash flow generation complementing the strength in sales and earnings — bioprocessing demand is improving as end market inventory and funding continue to normalize. That improvement in the bioprocessing end market is super important because it has been a huge overhang for Danaher shares, and the life sciences space in general. Bioprocessing is a broad term that refers to the research, development, manufacturing, and commercialization of products prepared from living cells or their components, including food, fuels, biopharmaceuticals, and so on. We were concerned about the bioprocessing market after rival Sartorius cut its guidance last week. So we were thrilled to see that while there is still some weakness, the trend is improving. On the post-earnings call with investors, management said large U.S. and European customers have worked through the majority of their excess inventories and are returning to normal ordering patterns. The book-to-bill ratio in biotechnology remains just shy of 1, compared to 0.95 last quarter. As a reminder, book-to-bill measures the amount of business booked, versus the amount billed; a ratio greater than 1 is favorable because it means that demand is exceeding supply and resulting in backlog growth. Still room for improvement then, but Danaher is heading in the right direction. The Chinese market remains weak. But the company said it is seeing growing demand from customers and expects it to grow next year thanks to government stimulus. Management doesn’t expect to see a real financial improvement materialize until 2025. The management team has effectively navigated the bioprocessing slowdown better than others and kept expectations managed — a big reason we’ve stuck by the stock during a difficult few quarters. The strong results and reaffirmed guidance were also backed up by management putting its “money where its mouth is” in a way we’ve not seen in a long time. In a serious show of confidence, management repurchased about 17.4 million shares during the quarter and another roughly 1.9 million in July, bringing the total to over 19 million shares. That is particularly notable because it represents the first buyback from the team in at least 10 years. When asked about the buyback, CEO Rainer Blair said management’s bias still leans to M & A. But from a return perspective, he said Danaher’s stock offers up a better value than many of the potential targets out there at the moment. The board of directors also authorized the repurchase of up to another 20 million shares. Based on these strong results and the improving bioprocessing market, we are raising our price target to $295 from $280 and reiterating our 1 rating. Guidance For the current quarter, the third of fiscal 2024, Danaher expects a revenue decline in the low single digits versus last year, on a core basis. That’s a slight miss versus expectations for an increase of less than 1%, according to FactSet. ( Core basis means it derives from the company’s primary business, excluding nonrecurring income and expenses. ) All three operating segments are expected to post sales decline rates in the low single digits. Management’s operating profit margin forecast of about 26% compares to the Street consensus of 26.9%, 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 1.5%. Baked into this view is the expectation that biotechnology sales will fall at a rate in the low-to-mid single digits, life sciences will fall in the low single digits, and diagnostics will advance low single digits — all unchanged from the previously provided outlook. Management reiterated its expectation for a full-year adjusted operating margin of about 29%, which is in line with analysts’ estimates. Quarterly results As seen in the product segments section below, better-than-expected results in biotechnology and diagnostics more than offset the slight weakness in life sciences. Moreover, organic growth, profitability, and cash flow all beat expectations. Biotechnology sales fell 7% on a core basis to $1.71 billion. Within the segment, the rate of decline in bioprocessing eased to the high-single digits, better than the high-teens decline seen in the first quarter, on a year-over-year percentage point basis. Sequentially, bioprocessing orders grew in the high-single digits, as the conditions in the U.S. and Europe continue to improve. Though bioprocessing demand in China was stable sequentially, Blair said it remains “weak as customers continue to manager liquidity.” We continue to see a strong runway for the segment as the rebound takes hold, with Blair reiterating his bullishness on the biotechnology opportunity. “The biologics market remains very healthy as evidenced by the increasing number of treatments both in development and production.” Notably, the number of new FDA approvals for biologic and genomic medicines in the first half of this year nearly doubled compared to the first half of 2023 and the full year 2024 is on track to set another record. Blair added that the underlying demand for biologic medicines remains on track to grow at a high single digit or better rate again for the full year 2024. “So given the substantial and sustained increase in approvals and production volumes, we expect the growth rate in Bioprocessing to remain very robust for many years to come,” he said. Life sciences sales dipped 5.5% on a core basis to $1.77 billion. Management said core revenue declined in the instrument businesses, global pharmaceutical and biotech demand remains weak, and academic markets were down sequentially. Applied markets, however, saw some improvement. In China, the team said it is beginning to see some improvement thanks to government stimulus. But don’t anticipate this to convert to orders until 2025 as these programs are in the early stages of implementation. In the meantime, many customers are delaying purchasing decisions as they await funding, the company said. Diagnostics sales advanced 3% on a core basis to $2.26 billion. Clinical diagnostics revenue rose at a rate in the mid-single digits. Management said the segment was led by high-single-digit growth at its Radiometer unit. Leica Biosystems sales growth rate was in the mid-single digits, while Beckman Coulter Diagnostics was up low-single digits, showing balanced strength in developed and high-growth markets. At subsidiary Cepheid, which handles molecular diagnostics, the team reported market share gains in molecular testing. Respiratory revenue of $300 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. Free cash flow was better than expected at $1.13 billion, but down about 14% versus the year-ago period. The company also achieved a free cash flow to net income conversion ratio of 125%. Year to date, that ratio stands at 129%. That means its earnings are fully backed by cash (and then some) 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. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.