With a number of industrially focused companies reporting some lackluster growth so far during earnings season, it was good to see Danaher (NYSE:DHR) report yet another quarter of mid-single-digit core revenue growth. The performance underlines how well CEO Tom Joyce has positioned the company for near- and long-term growth.
Moreover, it looks like there's upside potential to its full-year guidance, and the deal to buy General Electric's (NYSE:GE) biopharma business provides a multiyear growth opportunity. In short, Danaher remains a good place to hide for investors worried about a cyclical slowdown in the industrial economy.
Danaher keeps growing
As the chart below shows, the company has grown its core revenue at 5.5% or above since the third quarter of 2017, largely driven by strength in its life sciences and diagnostics segments. This augurs well for the impending GE biopharma acquisition. Meanwhile, environmental and applied solutions (water quality technology, product ID, and packaging) provides solid support.
Near-term and long-term profit drivers
The one fly in the ointment continues to be the dental segment, where ongoing declines in its consumables and traditional equipment business have constrained growth in the last few years. The good news: Danaher is set to IPO the business later this year.
This means the remaining company will have a consistent growth profile across its business, while the management of the new dental company, to be called Envista, will be able to focus on its growth opportunities as a stand-alone company.
As for the GE acquisition, the business is set to generate around a $1 billion in free cash flow (FCF) this year -- meaning Danaher is buying the business for a net purchase price of around 20 times FCF, a good deal for a growth business.
Although Joyce obviously can't discuss GE's trading performance in the second quarter, he did say:
What we've heard a little bit is just sort of very anecdotally that things continue to track quite well. Their first quarter was -- at core growth above where they've been in the last couple of years. So all indications are the business is in wonderful shape.
This sort of commentary bodes well for the acquisition.
The interesting thing about the dental IPO and the GE biopharma deal is that they provide an opportunity for growth through internal execution -- often seen as Danaher's killer advantage.
What about industrial exposure and China?
Two of the worry points going into earnings season are the industrial slowdown -- seen already in the earnings of industrial supply companies -- and economic conditions in China, particularly with regard to the ongoing trade conflict.
On these points, Danaher investors can feel comfortable. Joyce described its industrial exposure as "10% or less of the overall portfolio." Moreover, the industrial parts are actually doing quite well. The revenue of the industrial business of Hach (water quality testing) was up mid-single digits in the quarter, and Pall (filtration and separation) was also up mid-single digits in the quarter, according to Joyce.
Meanwhile, Danaher's revenue in China grew by 10% in the quarter, and in response to a question on China from J.P. Morgan's Tycho Peterson, Joyce said he didn't see a "meaningful slowdown" in end markets there as yet.
Guidance looks conservative
The progress the company has made this year has somewhat been masked by the extra costs associated with the GE deal. Management started the year with expectations for 4% core revenue growth and full-year non-GAAP (adjusted) EPS in the range of $4.75 to $4.85.
However, after a couple of good quarters management now expects full-year non-GAAP EPS to be $4.75 to $4.80. Superficially, it seems that its guidance has stood still, but note that the current guidance includes the dilution caused by the company's equity offerings in order to fund the GE biopharma deal. For reference, Danaher now expects its adjusted average diluted shares outstanding to be 737 million versus 710 million at the start of the year.
A better comparison is with core revenue guidance, with CFO Matt McGrew saying during the earnings call, "We are probably approximately 5% here for the full year from a core guide." The initial guidance for the year was for 4%.
Given that the first two quarters were at 5.5% and guidance for the third quarter is for around 4.5%, even the updated 5% figure could prove conservative.
On an estimated forward P/E of 25 times its 2020 earnings, Danaher certainly isn't a cheap stock, but it does have good self-help earnings prospects, and the Envista IPO and the GE biopharma acquisition will add to the stock's growth prospects and attractiveness. It might not be a screaming buy right now, but it looks like a relatively safe investment with good long-term prospects. That might suit many investors in an uncertain economic environment.