Goldman Downgrades PKI, LH, DHR

• Shares of PerkinElmer, Inc. PKI, Laboratory Corp. of America Holdings LH and Danaher Corporation DHR have all gained close to 15 percent year-to-date.
• Goldman Sachs’ Isaac Ro downgraded the ratings on all the companies.
• Although the 2016 fundamentals in Tools appears healthy, with biopharma R&D spend set to accelerate, there is limited upside to the shares of these companies, Ro said.

Volume growth in the Life Science Tools & Diagnostics segment is expected to be flat to modest in 2016 due to the stable utilization environment, analyst Isaac Ro said. He added that this is already reflected in the consensus expectations.

Ro commented that the pricing environment is unlikely to improve in 2016. In fact, there is a potential modest headwind to pricing from increased regulation.

PerkinElmer

Isaac Ro downgraded the rating on PerkinElmer from Neutral to Sell, while reducing the price target from $50 to $44. He added that there is 14 percent downside to the stock.

In the report Goldman Sachs noted, “We believe guidance and consensus expectations are too bullish on the trajectory for organic growth, which we view as the most important fundamental driver of multiple expansion in Tools.”

While the consensus models 180bps acceleration in FY16, this could prove challenging as “recent new product launches have underwhelmed and our industry checks have not suggested these new products will be game changers.”

PerkinElmer’s operating margins have expanded nearly 300bps since 2012. The company has guided to 50-75bps of annual margin expansion. Ro believes this margin expansion target will be tough to meet since restructuring and M&A opportunities have already been realized and incremental margin expansion would depend on faster organic growth.

LabCorp

Goldman Sachs downgraded the rating on the company to Neutral, while removing it from Americas Conviction List, citing merely 1 percent upside. The price target has been reduced from $142 to $126.

LabCorp has generated positive, yet below expectations volume growth YTD. Ro said that there is limited upside to consensus expectations, particularly around 2016 volumes.

Execution within Covance has been mixed. Its performance in 1H was soft, and management reduced the CVD organic growth guidance from 8 percent to 3 percent.

“Though Covance has held healthy book-to-bill in 2Q and 3Q we tempered our growth expectations following both quarters as we await evidence of improved execution,” Ro wrote. He added that an improved performance in 2016 may be insufficient to boost LabCorp’s shares.

Danaher

The analyst downgraded the rating on Danaher from Buy to Neutral, while reducing the price target from $104 to $103. He added that there is only 7 percent upside in the stock.

“While we still view DHR as a high quality franchise, we believe DHR’s end market mix will remain challenged into 2016,” the Goldman Sachs report stated. The company’s organic growth is likely to remain restricted by “challenged industrial end markets and geographies” in 2016.

Ro added, “We believe balance sheet leverage precludes upside via M&A in 2016.” He explained that management is unlikely to pursue any major capital deployment with the DHR-Fortive split expected to close by 3Q2016. M&A has typically been a key driver of the outperformance in the company’s shares. However, this is unlikely to provide a catalyst for growth in 2016.