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Morningstar | Danaher Should Sustain Solid Performance Even Though Currency and Tariffs Represent Small Hurdles

We plan to make a few adjustments to our model for narrow-moat Danaher, but the company’s fourth-quarter results largely keep the company in line with our expectations. Management’s outlook for $4.75 to $4.85 in adjusted EPS in 2019 is below our initial forecast, but we think its likely the company has started the year off on a conservative tone, especially with modest headwinds from China-related tariffs combined with negative currency effects. Economic growth concerns in China also don’t seem to be affecting the company so far, and management noted ongoing, broad-based double-digit growth in the country during the quarter.

Danaher’s 5.5% organic growth remains largely consistent with recent results and our expectations. With 7.5% organic growth during the quarter, the life sciences segment remains the highest growth division thanks in large part to strong underlying performance including high-single-digit growth in its Beckman life sciences, Sciex, Phenomenex, and Pall segments. Pall, in particular, continues to witness double-digit growth among its biotech customer group. The dental segment also posted a moderately improved growth rate of 2.5%, where management noted greater stability in the U.S. market and healthy performance in China. Danaher is still in the early stages of launching its clear aligner business, which could add a nice tailwind to the dental segment leading up to the expected spin-off of this business later this year. Lastly, 6% growth in the diagnostics and 5% growth in the environmental and applied segments mostly matched our forecasts.

While fourth-quarter operating margin of 17.9% was a bit weaker than we anticipated, down about 50 basis points form last year, we don’t anticipate a material shift in our future profitability assumptions. In addition to acquisition-, currency-, and tariff-related pressures on the bottom line, Danaher has also increased investment for certain initiatives, such as the clear aligner opportunity in the dental segment. Regardless, over the long term, we still see modest margin expansion opportunities thanks to integration and efficiency improvement efforts as well as operating leverage.