Another quarter, and more mid-single-digit core revenue growth for Danaher (NYSE:DHR). The company is seeing long-term benefits from the COVID-19 pandemic, and the acquisition of General Electric's biopharma business (now called Cytiva) has come out of the gate strong. There's a lot to like about the company, so let's take a look at the results and the investment proposition with the stock.
Danaher's second-quarter earnings
Second-quarter results were always going to be affected by the integration of Cytiva, but very few investors could have expected such a strong opening for the business. Reported revenue rose 19% with a core revenue increase (including Cytiva) of 3.5%.
There was some margin pressure (a 240 basis point year-over-year decline from 18.3% to 15.9%) due to adjustments made relating to the Cytiva acquisition. But without them, "operating profit margins increased by more than 150 basis points year over year," according to CEO Tom Joyce on the earnings call.
Meanwhile, the highly cash-generative nature of Cytiva shone through in the reported improvement in free cash flow from $1.49 billion to $1.98 billion in the second quarter. All told, it was a strong quarter for the company, and as you can see below, it kept up its run of mid-single-digit core revenue growth.
Cytiva sits in the life sciences segment and helped contribute to 8% year-over-year core revenue growth for that division in the quarter. Indeed, Joyce outlined that "Cytiva achieved more than 20% core revenue growth in its first full quarter as part of Danaher, exceeding our expectations." Clearly, the bioprocess market is running hot, and that could be good news for a pure-play bioprocess company like Repligen.
Cytiva helped life sciences revenue bounce back, but the segment's growth is still being hurt by declining sales of instrumentation due to the closure of non-COVID-related research labs. That's something that could continue into the third quarter, with Joyce estimating "that approximately 50% to 60% of academic research labs in developed markets are now open in some capacity," with a figure closer to 90% in China.
No matter: Management still expects low-double-digit core revenue growth for life sciences in the third quarter, and that figure could be exceeded if non-COVID research labs open up at a quicker rate.
Danaher's diagnostics segment continues to report strong growth, and it's receiving a boost during the COVID-19 pandemic. Joyce said that its Cepheid diagnostics business generated core revenue growth of 100% in the quarter, largely from its COVID-19 test and the instrumentation that runs it. In addition, Danaher has high hopes for its recently announced "4-in-1 combination test," which tests for COVID-19, versions of the flu, and respiratory syncytial virus infections.
Management expects diagnostics sales to be up by the high single digits in the third quarter, and here again there could be more if the pandemic has a second wave. In addition, strong instrumentation sales due to COVID-19 are likely to encourage medical bodies to buy Danaher's non-COVID tests in the future.
Environmental and applied solutions
It wasn't surprising to see this segment's core revenue down 8.5% in the quarter. The pandemic has obviously slowed industrial activity -- not good news for Danaher's industrial water-treatment business or its product ID solutions.
But investors would have been encouraged to hear that the segment had strong results in China in the quarter. Moreover, management expects Europe and the U.S. to follow China in recovery growth as the worst of the pandemic passes. Core revenue growth in the third quarter is forecast to be similar to the same quarter of last year.
What it means to investors
All told, Joyce is expecting mid- to high-single-digit core revenue growth in the third quarter. It's a positive enough outlook, but there could be more on top for the reasons outlined above. Meanwhile, the Cytiva acquisition is off to a great start and promises to turn Danaher into the leading force in bioprocessing.
As the chart above shows, Danaher is not exactly a cheap stock on conventional metrics, but high-quality stocks rarely come with bargain-basement prices. For long-term investors, Danaher is probably worth buying and holding, but those who are cautious may want to wait and hope for a dip in order to get an entry point into a high-quality investment.