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Morningstar | DHR Updated Forecasts and Estimates from 18 Jul 2019

Narrow-moat Danaher reported second-quarter operating results on July 18 that beat consensus expectations and caused management to increase its guidance slightly for the full year. However, that updated view remains roughly in line with our expectations for the full year, so we do not anticipate changing our $120 per share fair value estimate, which remains moderately below recent share prices.

In the second quarter, Danaher turned in $5.2 billion in sales, or 3.5% reported growth and 5.5% core growth. This internal growth was led by the life sciences and diagnostics segments (both at 7.5% core growth), while the environmental/applied solutions segment grew only 4.0% and the dental segment remained a drag on the organization, with a slight decline during the period. In life sciences, the Beckman Coulter and Pall franchises each grew in the high single digits and continue to benefit from strong growth trends in the biopharmaceutical end market. In diagnostics, the company's legacy franchises appear solid, and recently acquired Cepheid in molecular diagnostics turned in over 20% growth in the quarter and appears to be benefiting from DBS-related initiatives. In dental, the company's traditional consumables and equipment continued to decline, which contributed to that segment's margin pressure along with ongoing investment. China also remained a solid contributor, with about 10% growth in the quarter despite general headwinds in that country.

As a result of these trends, Danaher's view of the full year's core growth prospects has increased to about 5% from 4%. With the company's strong core growth and solid margin performance, management increased the lower end of its adjusted earnings per share outlook range for 2019. That view of $4.75 to $4.80 in earnings versus $4.70 to $4.80 for 2019 remains roughly in line with our expectations and does not materially change the firm's long-term prospects, in our opinion.

Danaher's portfolio management activities remain on track as well. The company still aims to purchase GE Biopharma near the end of 2019, and the IPO of its dental segment, which will be called Envista, remains on track for the second half of the year, too. These activities are attractive for Danaher from a business quality perspective, as the company looks set to cut its exposure to the relatively low-margin and slow-growing dental segment and boost its exposure to the relatively high-margin and faster-growing life sciences business. Also, from a moat perspective, the GE Biopharma acquisition will significantly increase Danaher’s exposure to the biopharmaceutical development and manufacturing business, which is very sticky and attractive, in our opinion. However, the significant invested capital being paid could keep Danaher’s returns on invested capital near its capital costs for several years, which influences our view of the company's moat.