In the latest indication of how the COVID-19 pandemic is negatively affecting businesses, Danaher (DHR 0.15%) came out recently and withdrew its full-year guidance.
The medically focused company is often seen as being a defensive option for investors, so the update may have come as somewhat of a surprise. Does it change the investment proposition for the stock? Here's the lowdown.
A defensive growth stock
To start, let's take a look at why Danaher is seen as a defensive option. It reports out of three business segments: life sciences, diagnostics, and environmental and applied solutions.
The life sciences businesses make tools that help scientists research diseases and test drugs. It's a business that's about to get bigger for Danaher thanks to the acquisition of General Electric's (GE -0.32%) biopharma business for a very attractive price.
Image source: Getty Images.
Danaher's diagnostics businesses make instruments and consumables used by healthcare bodies (such as hospitals and laboratories) to diagnose diseases. Finally, the environmental and applied solutions segment is a collection of water quality treatment and product identification businesses.
All three segments are seen as being relatively recession resistant, and you could make the case that there will be no shortage of funding for research and development on diseases, and diagnostics testing in a post-COVID-19 world.
Data source: Danaher presentations. Chart by author
Danaher still missed expectations
All of the above is wonderful in theory, but the fact is, the update on April 13 saw the company outlining expectations to achieve non-GAAP core revenue growth of just 4.5% in the first quarter, compared to previous guidance for 6%-6.5%.
Moreover, CEO Tom Joyce noted that there was "a meaningful slowdown in demand toward the end of the quarter, particularly in our more instrument-oriented businesses." In other words, the run rate of growth right now is probably lower than the 4.5% in the quarter, and certainly lower than the 5% management was previously expecting for the full year.
Data source: Danaher presentations. YOY=year over year. Chart by author.
Does it matter?
The answer is, yes and no. If you are focused on a company's yearly outlook, then it's clear that Danaher is unlikely to hit its previous full-year guidance -- not least because the first quarter has already missed expectations, and Danaher is already into its second quarter with the COVID-19 pandemic still significantly affecting the economy.
On the other hand, if you are focused on the long term, the news shouldn't worry you too much, for four main reasons.
First, the nature of the slowdown is more of a case of a sudden cessation of activity, rather than an underlying downward trend. In fact, as you can see in the chart above, Danaher's core revenue growth has been in the mid-single-digit range for a couple of years.
Second, as noted above, in a post-COVID-19 world it's likely that there will be extra emphasis on researching and diagnosing diseases.
Third, around 70% of Danaher's revenue comes from recurring sources (consumables), so it has a solid base revenue to support it in any downturn. Indeed, Danaher's recent update noted that the slowdown was "particularly in our more instrument-oriented businesses."
Fourth, this doesn't appear to be a Danaher specific issue. For example, GE's healthcare segment is seeing reduced demand for equipment because some patients are deciding to forego elective surgical procedures right now. That's also something Johnson & Johnson (JNJ 0.51%) highlighted in its first-quarter earnings report.
J&J VP of Investor Relations Chris DelOrefice outlined that its medical devices revenue was being negatively affected because elective procedures were being "deferred and hospital resources are redeployed to address patients impacted by this pandemic."
Clearly, the key priority for hospitals and healthcare bodies is addressing the immediacy of the COVID-19 pandemic, rather than buying medical equipment from GE or J&J right now, and the same applies to Danaher's instrumentation sales.
However, after the pandemic is contained it's likely that all three of these companies will experience a bounce-back in sales as healthcare bodies patients undergo procedures again and realign their spending priorities.
Danaher is still a defensive option
All told, the recent downgrade to 2020 expectations isn't anything to be overly worried about for long-term investors. Unless the pandemic turns into a multi-year event that cripples the global economy, Danaher is still set to continue growing revenue and earnings over the long-term.
