Danaher (DHR) Poised To Gain From Buyouts Despite Cost Woes

We issued an updated research report on Danaher Corporation (NYSE:DHR) on Mar 6.

The company is a global conglomerate that specializes in products and services meant for use in the professional, commercial, industrial and medical products. It is headquartered in Washington, DC.

Many tailwinds and headwinds are impacting Danaher’s performance. Let’s delve deeper.

Factors Favoring Danaher

Healthy Projections: For 2020, the company anticipates benefiting from solid commercial execution, product innovation and Danaher Business System (DBS) initiatives. Adjusted earnings in the year are anticipated to be $4.80-$4.90 per share, suggesting an increase from $4.42 reported in 2019.

Also, it believes that core sales in the first quarter of the year will grow 6-6.5%, suggesting growth from 5.5% recorded in the first quarter of 2019.

Acquisitions/Divestitures: Over time, Danaher has been gaining from its inorganic measures, including disposals and buyouts. Notably, the company’s sales growth was boosted by 0.5% in the fourth quarter of 2019 and by 1% in 2019 on contributions from acquired assets.

Danaher acquired Integrated DNA Technologies in April 2018, Blue Software in July 2018, and added Labcyte Corporation to its portfolio in January 2019. Also, the company is due to acquire General Electric Company’s (NYSE:GE) Biopharma business. The deal is anticipated to close in the first quarter of 2020. The acquisition is expected to enhance Danaher’s biologics workflow solutions business and prove 45-50 cents per share accretive to earnings in the first year of the deal completion.

In addition to these buyouts, the company believes that the divestment of its dental business in 2019 will help in boosting shareholder value.

Rewards to Shareholders: Enhancing shareholders’ value through dividend payments is a priority for Danaher. The company disbursed $526.7 million as dividends, reflecting growth of 21.5% from the previous year.

It is worth mentioning here that Danaher announced a 6% increase in its quarterly dividend rate in March 2019. We believe that the healthy cash position will help the company in rewarding shareholders going forward.

Factors Working Against Danaher

Higher Costs and Expenses: In fourth-quarter 2019, the company’s cost of sales increased 4.5% year over year, and its operating expenses expanded 4.3% year over year. Similarly, it recorded a 5.1% increase in cost of sales and a 4.1% hike in operating expenses in 2019.

We believe that a hike in the cost of sales and operating expenses, if uncontrolled, can affect the company’s margins and profitability.

Forex Woes: International operations have exposed Danaher to risks stemming from geopolitical issues and unfavorable movements in foreign currencies. In fourth-quarter 2019, the adverse impacts of foreign currency movements lowered its sales by 1%.

We believe that the persistence of the headwind might be dragging for Danaher.

Debts and Other Concerns: High debts increase financial obligations and in turn, hurt profitability. Danaher’s long-term debts of $21.5 billion at the end of fourth-quarter 2019 reflect a sequential increase of 30.1% and a year-over-year hike of 122%.

It is worth mentioning that proceeds from borrowing (with maturities longer than 90 days) totaled $12.1 billion in 2019. However, repayments for such debts were just $1.6 billion in the year.

In addition, the company faces competition from other players, including 3M Company (NYSE:MMM) and United Technologies Corporation (NYSE:UTX) , belonging to the same industry.

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