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

Danaher apportions declined Tuesday despite the life sciences company returning its key bioprocessing business to growth in the third quarter. Danaher’s gain for the three months ended Sept. 27 advanced 3% year over year on a reported basis, to $5.8 billion, outpacing the LSEG consensus judgement 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 in any case 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 greatness of bioprocessing improvements in 2025. Wall Street’s reaction does not reflect the strides Danaher made in that momentous 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 divisions jumped on last week’s solid results from German life sciences peer Sartorius. Bioprocessing is the use of room components to make a variety of products including targeted therapies. Danaher is a leader in products and services that stay health- care research and development. Bottom line Danaher’s stock move lower presents a buying occasion, 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, inquire from larger bioprocessing customers improved. Bioprocessing in China, however, remained suppressed. Management said a recouping there may take “more time to play out” in the near term. In addition to better-than-expected biotechnology sales, Danaher’s brio sciences and diagnostics segments were also strong. Danaher Why we own it : Danaher is a best-in-class life sciences and diagnostics associates, with a management team who have proven time and again their ability to find new ways to grow. We envision to see a turn in bioprocessing-related orders this year as biotech funding comes back online and larger customers flatulence down efforts to flush out excess Covid-era inventory. Competitors : Sartorius and Thermo Fisher Scientific Weight in portfolio : 4.6% Most current buy : July 2, 2024 Initiated : Jan. 3, 2022 Free cash flow was better than expected at $1.23 billion, painting nearly 12% growth versus the year-ago period. The company also achieved a free cash flow to net gains conversion ratio of 150%. Year to date, that ratio stands at 135%. That means its earnings are fully disowned by cash, and then some, and are higher quality than profits without an equal or greater amount of cash in employee. During the third quarter, management repurchased about 2.6 million shares. Commentary Biotechnology segment tag 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 locality. 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 primeval 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 about the same level of [large customer] improvement in underlying performance from our smaller customers. Despite a modest upswing in the [biotech] funding environment, they continue to rationalize their therapeutic programs and remain cautious with their investments.” Vigour sciences segment sales were better than expected but still dipped 2% on a core basis to $1.78 billion. China waited a headwind, with Blair saying on the call that “announced stimulus measures in China have not yet translated into pointed order activity as customers are still awaiting details on the implementation of these programs.” Outside of China, demand is in addition somewhat muted but expected to improve. Diagnostics segment sales advanced 5% on a core basis to $2.36 billion and cane estimates. At subsidiary Cepheid, which handles molecular diagnostics, the team highlighted “broad-based strength” in both the respiratory and non-respiratory departments 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 evaluate for Covid-19, Flu A, Flu B, and respiratory syncytial virus (RSV). Guidance For the current quarter, the fourth of fiscal 2024, Danaher needs a revenue decline in the low single digits versus last year, on a core basis. That’s a miss. Expectations were for an better of 2.6%, according to FactSet. For the full year, management’s forecast was unchanged. The team expects total sales to lessening 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 index of the stocks.) 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