Why is Danaher (DHR) up 4.3% since its last earnings report?

It’s been about a month since Danaher’s (DHR) last reported earnings. Shares are up about 4.3% in that time, underperforming the S&P 500.

Will the recent positive trend continue into its next earnings release, or is Danaher headed for a pullback? Before we dive into how investors and analysts have reacted recently, let’s take a quick look at the latest earnings report to better understand the important catalysts.

Danaher beats Q2 results, provides impressive outlook

Danaher maintained its earnings streak in the second quarter of 2020. Earnings beat estimates by 35.8% and sales by 6.7%.

The company’s adjusted earnings for the reported quarter came to $1.44 per share, surpassing the Zacks Consensus Estimate of $1.06. Earnings also increased 32.1% from the year-ago quarter’s figure of $1.09, primarily due to sales growth.

Revenue details

The company’s net sales for the quarter were $5,297.4 million, up 19.2% year over year. Organic sales for the quarter were down 0.5%, with currency translation having a negative impact of 2%. On the other hand, acquisitions/divestitures had a positive impact of 21.5%.

As noted, Cytiva contributed 4% positively to sales growth in the quarter. Organic sales, including the impact of Cytiva, increased 3.5% year over year.

Of note, Danaher completed the acquisition of General Electric’s BioPharma business in the first quarter of 2020. The acquired BioPharma business is part of Danaher’s Life Sciences segment and is called Cytiva.

Additionally, the company’s revenues surpassed the Zacks Consensus Estimate of $4.963 billion.

It reports net sales in three segments—Life Sciences, Diagnostics, and Environmental & Applied Solutions. The segment information is briefly discussed below:

Revenues for Life Sciences segment reached $2,642.4 million, up 54.5% year-over-year. Acquisitions/divestitures had a positive contribution of 55.5% of the sales growth, while currency issues had a negative impact of 1%. Underlying sales were flat year-over-year.

However, Cytiva saw a positive impact of 8% and, including this, organic sales for the quarter were up 8% year-over-year.

Revenues in Diagnostics The segment earned $1,660.2 million, up 2.5% year-over-year. The improvement was driven by a 5% increase in core sales, which was partially offset by a 2.5% negative impact from currency translation.

Revenues in Environmental and applied solutions segment totaled $994.8 million, down 10.5% year-over-year. The decline was due to an 8.5% decline in core sales and a 2% negative impact from currency translation.

Margin Profile

During the quarter, Danaher’s cost of sales increased 24.7% year over year to $2,444.8 million. This represented 46.2% of net sales, compared to 44.1% in the same quarter a year earlier. 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 represented a year-over-year increase of 21.3%. As a percentage of net sales, it represented 31.8%, compared to 31.3% in the prior-year quarter. Research and development expenses of $322.6 million represented an increase of 14.4% year-over-year. It represented 6.1% of net sales, compared to 6.3% in the prior-year quarter.

Operating income for the quarter increased 4.1% year over year to $844.6 million. Operating margin decreased 240 bps to 15.9% for the quarter. Results were negatively impacted by an 80 bps negative impact from core business and a 400 bps negative impact from miscellaneous sources, partially offset by a 240 bps contribution from acquisitions.

Interest expenses totaled $78.6 million in the quarter, up from $19.7 million recorded in the same quarter last year.

Balance sheet and cash flow

Coming out of 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 loans with maturities greater than 90 days. It also repaid $3,750 million of loans with maturities greater than 90 days.

The company generated $1,445 million of net cash from operations during the quarter, up 37% year over year. Capital used for the purchase of fixed assets totaled $155.4 million compared to $154.3 million in the same quarter last year.

Free cash flow (non-GAAP) for the quarter improved 41% year over year to $1,289.9 million.

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

Perspectives

In the coming quarters, Danaher expects to benefit from a solid product portfolio, operational execution, committed team and strong balance sheet.

In Q3 2020, the company expects core revenue growth in the low to mid-single digits. It further believes that Cytiva’s impact on core sales will be 300-400 basis points, and including this contribution, core sales growth for the quarter will be in the mid to high single digits.

How have estimates changed since then?

Over the past month, investors have witnessed an upward trend in new estimates. The consensus estimate has moved 7.54% due to these changes.

VGM Results

Danaher currently has an average Growth Score of C, a grade with the same grade on the momentum front. Charting a somewhat similar path, the stock has a grade of D on the Value side, which puts it in the bottom 40% for this investment strategy.

Overall, the stock has a Composite VGM Score of D. If you’re not focused on a single strategy, this rating should interest you.

Perspectives

Estimates for the stock are generally trending higher, and the magnitude of these revisions looks promising. It is no surprise that Danaher has a Zacks Rank #2 (Buy). We expect the stock to deliver above-average returns over the next few months.

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