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Danaher Earnings: Bioprocessing Unit May Be Bottoming Amid Veralto Spinoff

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Narrow-moat Danaher DHR turned in solid third-quarter results, as its bioprocessing business appears to be bottoming near management expectations. At first blush, we do not anticipate changing near-term expectations or our $243 fair value estimate materially, which incorporates the Veralto spinoff. Danaher’s shares remain moderately undervalued.

After the pandemic boom years, Danaher’s results continued to reset in the third quarter with revenue down 12% on a core basis (in constant currency and organically) while adjusted EPS declined 21%. This top-line performance included significant declines in former high-flying businesses. Specifically, the new biotechnology segment, which provides bioproduction tools for drug makers and benefited from COVID-19 vaccine production in recent years, declined 21% on a core basis. This decline reflected inventory destocking, more cautious buying from emerging and established customers due to external uncertainties, and challenges in China. However, that business hit management expectations and may be in the process of finding a bottom in demand. The diagnostics segment, which benefited from COVID-19-related testing in recent years, declined 16% on a core basis, although the Cepheid business outperformed expectations. With this deleveraging on the top line, margins contracted too, which caused the EPS decline.

For 2023, our expectations have not changed materially. Management expects a core revenue decline in the low double digits, which is on the weak end of its previous expectations without the Veralto assets. However, with Danaher’s focus on continuous improvement, it maintained an adjusted operating margin assumption of around 29%, which is a good sign for future margin development. Also, beyond the ongoing reset and Veralto spinoff that could constrain results into 2024, we still expect Danaher to return to more normal growth patterns, including high-single-digit revenue growth and low-double-digit earnings growth in the long run.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Julie Utterback

Senior Equity Analyst
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Julie Utterback is a senior equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. Within the healthcare industry, she covers medical technology and service companies. She is also the chairperson of the equity research team’s capital allocation methodology.

Utterback joined Morningstar in 2005 as an equity analyst in the healthcare industry. At that time, she covered medical technology companies, including orthopedic device, medical equipment, and cardiac device firms. In 2010, she joined Morningstar's credit research team, initiating coverage of the entire healthcare industry and generally helping the organization expand and maintain its credit coverage across many industries. She held that senior credit analyst role until April 2019, when she returned to the equity team to cover medical technology and service companies.

Prior to joining Morningstar, Utterback was an equity analyst at State Farm Insurance for several years. She holds a bachelor's degree in finance from the University of Illinois Urbana-Champaign. She also holds the Chartered Financial Analyst® designation.

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