Danaher returns a key business to growth, and we’re raising our stock rating back to buy

Danaher shares declined Tuesday despite the life sciences company returning its key bioprocessing business to growth in the third quarter. Danaher’s revenue for the three months ended Sept. 27 advanced 3% year over year on a reported basis, to $5.8 billion, outpacing the LSEG consensus estimate of $5.59 billion. On an organic basis, sales were up 0.5%. Adjusted earnings per share decreased 0.6% annually to $1.71 but still topped the $1.57 per share that had been expected. DHR YTD mountain Danaher YTD The stock dropped 4% as investors questioned the sustainability and magnitude of bioprocessing improvements in 2025. Wall Street’s reaction does not reflect the strides Danaher made in that important end-market, which is contained in the company’s biotechnology segment. Some of Tuesday’s weakness could also be attributed to profit-taking since Danaher shares jumped on last week’s solid results from German life sciences peer Sartorius. Bioprocessing is the use of cell components to make a variety of products including targeted therapies. Danaher is a leader in products and services that support health- care research and development. Bottom line Danaher’s stock move lower presents a buying opportunity, and we’re upgrading it to our buy-equivalent 1 rating and increasing our price target to $305 per share from $295. With the long-running destocking headwind abating, demand from larger bioprocessing customers improved. Bioprocessing in China, however, remained suppressed. Management said a recovery there may take “more time to play out” in the near term. In addition to better-than-expected biotechnology sales, Danaher’s life sciences and diagnostics segments were also strong. 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 Free cash flow was better than expected at $1.23 billion, representing nearly 12% growth versus the year-ago period. The company also achieved a free cash flow to net income conversion ratio of 150%. Year to date, that ratio stands at 135%. That means its earnings are fully backed by cash, and then some, and are higher quality than profits without an equal or greater amount of cash in hand. During the third quarter, management repurchased about 2.6 million shares. Commentary Biotechnology segment sales in Q3 dipped 0.7% on a core basis to $1.65 billion but exceeded estimates. Bioprocessing realized low-single-digit growth in the quarter. Bioprocessing has been under pressure in recent quarters due to a lack of funding for smaller businesses after the collapse of Silicon Valley Bank in early 2023 and destocking from larger customers coming out of the Covid pandemic. On the post-earnings call, Danaher CEO Rainer Blair said, “We’re not seeing the same level of [large customer] improvement in underlying performance from our smaller customers. Despite a modest improvement in the [biotech] funding environment, they continue to rationalize their therapeutic programs and remain cautious with their investments.” Life sciences segment sales were better than expected but still dipped 2% on a core basis to $1.78 billion. China remained a headwind, with Blair saying on the call that “announced stimulus measures in China have not yet translated into meaningful order activity as customers are still awaiting details on the implementation of these programs.” Outside of China, demand is still somewhat muted but expected to improve. Diagnostics segment sales advanced 5% on a core basis to $2.36 billion and beat estimates. At subsidiary Cepheid, which handles molecular diagnostics, the team highlighted “broad-based strength” in both the respiratory and non-respiratory parts of the business. Respiratory revenue of $425 million more than doubled management’s expectations due to higher volumes and a favorable mix of its 4-in-1 test for Covid-19, Flu A, Flu B, and respiratory syncytial virus (RSV). Guidance For the current quarter, the fourth of fiscal 2024, Danaher expects a revenue decline in the low single digits versus last year, on a core basis. That’s a miss. Expectations were for an increase of 2.6%, according to FactSet. For the full year, management’s forecast was unchanged. The team expects total sales to decline by low single digits compared to expectations for a decline of 0.5%. (Jim Cramer’s Charitable Trust is long DHR. See here for a full list of the stocks.) 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