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Why Is Danaher (DHR) Down 14.5% Since Last Earnings Report?

It has been about a month since the last earnings report for Danaher (DHR). Shares have lost about 14.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Danaher due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Danaher’s Q4 Earnings and Sales Surpass Estimates

Danaher reported better-than-expected results for the fourth quarter of 2019, with earnings and sales surpassing estimates by 1.6% and 1.7%, respectively.

The company’s adjusted earnings were $1.28 per share in the reported quarter, which outpaced the Zacks Consensus Estimate of $1.26. The same also grew 12.3% from the year-ago quarter’s figure of $1.14 on sales growth and margin improvement.

For 2019, the company’s adjusted earnings were $4.42 per share, increasing 9.1% year over year. However, the bottom line lagged the Zacks Consensus Estimate of $4.67.

Segmental Sales

In the quarter under review, the company’s net sales were $4,868.4 million, which grew 5.7% from the year-ago quarter. Organic sales in the quarter grew 6% and acquired assets had a positive 0.5% impact. However, foreign-currency translations had a negative impact of 1%.

Also, the company’s top line surpassed the Zacks Consensus Estimate of $4,787 million.

Effective third-quarter 2019, the company started reporting net sales under three segments — Life Sciences, Diagnostics, and Environmental & Applied Solutions. The segmental information is briefly discussed below:

Revenues for the Life Sciences segment totaled $1,916 million, rising 6.8% year over year. Results were driven by 1% gain from acquired assets and 6.5% growth in core sales, partially offset by a 0.5% adverse impact of foreign-currency translations.

Revenues in the Diagnostics segment grossed $1,804.5 million, increasing 7.1% year over year. The improvement came on the back of 8% rise in core sales, which was partially offset by a 1% negative impact of foreign-currency translations.

Revenues in the Environmental & Applied Solutions segment totaled $1,147.9 million, rising 1.9% year over year. The uptick can be attributed to 2.5% growth in core sales. However, foreign-currency translations had an adverse impact of 0.5%.

For 2019, the company’s net sales were $17.9 billion, reflecting growth of 5.1% from the previous year. However, the top line lagged the Zacks Consensus Estimate of $19.9 billion.

Margin Profile

In the quarter under review, Danaher’s cost of sales rose 4.5% year over year to $2,164.8 million. It represented 44.5% of net sales compared with 45% in the year-ago quarter. Gross margin increased 50 basis points (bps) year over year to 55.5%.

Selling, general and administrative expenses of $1,448.1 million reflect a year-over-year increase of 3.9%. As a percentage of net sales, it was 29.7%. Research and development expenses were $293.8 million, which rose 6.4% year over year. It represented 6% of net sales.

Operating income in the quarter under review grew 11.4% year over year to $961.7 million. Operating margin increased 100 bps to 19.8% in the quarter. The improvement was driven by the contribution of 175 bps from the core business, partially offset by 15-bps adverse impact of acquisitions and 60-bps impact of miscellaneous sources.

Interest expenses doubled year over year to $44.4 million.

Balance Sheet and Cash Flow

Exiting the fourth quarter, Danaher had cash and cash equivalents of $19,912.3 million, up 39.7% from $14,252.1 million at the end of the last reported quarter. Long-term debt balance rose 30.1% sequentially to $21,516.7 million.

In 2019, the company generated net cash of $3,657.4 million from operating activities, increasing 0.4% from the previous year. Capital used for purchasing property, plant and equipment totaled $635 million versus $583.5 million in the previous year.
 
In the year, the company paid out dividends worth $526.7 million to its shareholders.

Outlook

In the quarters ahead, Danaher expects to consistently benefit from Danaher Business System initiatives. These efforts enabled the company to focus more on product innovation, superior product quality, building an efficient workforce and enhancing shareholder value.

Also, Danaher anticipates completing the acquisition of General Electric’s Biopharma business in the first quarter of 2020. The buyout will likely strengthen the company's biologics workflow solutions business under its Life Sciences segment.
 
For the first quarter of 2020, Danaher anticipates adjusted earnings of $1.06-$1.09 per share. Core sales growth is forecast to be 6-6.5% (including the impact of three extra selling days).

For 2020, the company anticipates adjusted earnings per share of $4.80-$4.90. Core sales growth will likely be 5%.

How Have Estimates Been Moving Since Then?

Estimates revision followed a flat path over the past two months. The consensus estimate has shifted 5.64% due to these changes.

VGM Scores

Currently, Danaher has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Danaher has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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