Why Danaher's Stock Slump This Week Is a Buy Signal

Danaher's Mixed Earnings Report and Guidance Changes

Investors in Danaher, a company that operates in biotechnology, life sciences, and diagnostics solutions, have experienced a volatile week. The stock initially dropped after the release of its second-quarter earnings report but managed to recover slightly throughout the week. By Friday morning, the stock had declined by 12.1% for the week.

Despite the company beating earnings estimates and raising its full-year earnings per share (EPS) guidance to $8.45-$8.60 from a previous range of $8.35-$8.55, the stock still saw a significant drop. The reason behind this reaction lies in the fact that a portion of the increased guidance comes from an earlier-than-expected acquisition of Masimo, a medical technology company.

In addition to this, Danaher has reduced its full-year core sales growth expectations in its highest margin business, biotechnology. This adjustment has raised concerns among investors about potential impacts on full-year profit margin expectations.

Full-Year Core Sales Growth Guidance

Here is a breakdown of Danaher's full-year core sales growth guidance:

• At April:
• Biotechnology: 6%
• Life Sciences: Up slightly
• Diagnostics: Up low-single-digits

• Total Company: 3%-6%

• At July:

• Biotechnology: Up mid-single-digit
• Life Sciences: 3%-4%
• Diagnostics: Up slightly

• Total Company: Up mid-single-digit

• Second Quarter Adjusted Operating Profit Margin:

• Biotechnology: 41%
• Life Sciences: 21%
• Diagnostics: 24.5%
• Total Company: 27.1%

Data source: Company presentations. Table by the author.

What the Guidance Change Means

The reduction in growth expectations for the biotechnology segment is not a major shift in overall company sales growth expectations. However, it could affect full-year profit margin expectations.

According to CEO Rainer Blair, the disappointing news in biotechnology came down to consumables sales coming in "below our expectations as a few large shipments for programs at our commercial customers moved out of the quarter." He explained that this was a shift in shipment timing at a few large commercial drug manufacturers for molecules that were specced into specific programs.

Analysts questioned why these shipments wouldn't simply move to the third and fourth quarters. Blair outlined that some chromatography resin shipments had moved out of the year. However, there is a good reason to believe these shipments will proceed, as biotechnology shipments can be lumpy. The sell-off appears to be a significant overreaction to an otherwise positive report. For long-term investors, this could be a good time to consider picking up some shares.

Should You Buy Stock in Danaher Right Now?

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Danaher. The Motley Fool has a disclosure policy.

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