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Morningstar | Danaher Parting With Underperforming Dental Business as Remainder of Business Shines

Overall, narrow-moat Danaher reported strong second-quarter results across most of its businesses. We plan to slightly increase our near-term projections, which may lead to a modest bump to our fair value estimate. Our adjusted EPS estimate of $4.43, previously at the high end of management's year-end outlook, now falls at the low end of the company's updated range of $4.43 to $4.50. Management noted a slight headwind from the implementation of tariffs, but we view the issue as relatively immaterial for now barring potential larger macroeconomic side-effects on demand.

The company's biggest announcement stems from the decision to spin-off its dental segment, which currently represents about 15% and 11% of the top and bottom line, respectively. Given the dental segment's consistent underperformance, we think separating these assets makes sense, and we're not too surprised by management's choice. We surmise that management has realized there are more attractive uses of capital within its life science and diagnostics operations rather than making necessary investments to dramatically improve the dental business. This business has continually fallen below management's performance goals, and we've long been concerned with competitive issues in the dental industry, highlighted by our negative moat trend ratings on peers like Dentsply Sirona and Straumann. Additionally, the dental segment doesn't share many of the more attractive razor and blade attributes of Danaher's other business segments.  As a positive, management noted general consumables and equipment growth for the first time since 2016 in this segment, led largely by Europe and China offsetting ongoing inventory adjustments in the U.S. market. Meanwhile, Danaher's specialty implant and orthodontics operations continue to witness low but stable growth.

Danaher's other business segments continue to perform well thanks to new products, stable underlying industry demand, and market share gains. The life science segment as well as the environmental and applies solution segment both posted internal growth of 7.5% each, which fall above our outlook. The life science segment, in particular, continues to benefit from healthy biopharma customer demand across a number of product categories--a trend we expect to continue. Diagnostic segment internal growth of 5% did fall short of our expectations, especially with management noting only high-single-digit growth for Cepheid. We expect a rebound to double-digit growth, however, as management highlighted a tough year-over-year comparison in developing market sales.