Danaher Earnings: Weakness in Bioprocessing Unit Further Pushes Down 2023 Guidance

Narrow-moat Danaher DHR turned in weak second-quarter results relative to a tough comparable period a year ago, and management reduced its 2023 outlook again on bioprocessing unit weakness. However, mild changes to our near-term assumptions do not materially affect our $265 fair value estimate, and Danaher’s shares continue to look reasonably valued to us.

After the pandemic boom years, Danaher’s results continued to reset in the second quarter with revenue down 8% (down 7% on a core basis in constant currency and organically) while adjusted EPS declined 26%. 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 17% on a core basis, including inventory destocking at customers and more cautious buying from emerging customers in the wake of recent financing concerns. The diagnostics segment, which benefited from COVID-19-related testing in recent years, declined 12% on a core basis. With this deleveraging on the top line and restructuring efforts, margins contracted significantly, which caused the steep decline in adjusted EPS. More positively, free cash flow held up better than adjusted EPS, with free cash flow only declining 7% year over year.

For 2023, management reduced its outlook slightly, primarily on weakness in the bioprocessing unit. Now, Danaher expects a core revenue decline in the high single digits to low double digits (down from a high-single-digit decline expected previously). The company also reduced its operating margin assumption by about 100 basis points on this deleveraging. We now think a midteens decline in adjusted EPS is likely in 2023, down from a low-double-digit decline expected previously. However, beyond this reset period in 2023, we still expect Danaher to return to more normal growth patterns, including low-double-digit earnings growth.