Danaher Bears The Brunt Of Macro Woes: Analyst Flags Lower Demand, Reduced Funding & Weakness In China

KeyBanc Capital Markets analyst Paul Knight reiterated the Overweight rating on Danaher Corporation DHRlowering the price target to $300 from $325. 

Knight notes that after a strong period in 2021 and early 2022, the life science tools sector, including DHR, has been underperforming in FY23.

The analyst adds that there have been headwinds due to destocking in consumables used in biological production (such as filters and single-use bags), leading to reduced demand as customers worked down stockpiles in FY23.

Additionally, funding for early-stage biotech customers has dried up as exit the pandemic, and weakness in China brought biotech spending to a slow pace during the 2Q23 results period, the analyst cautioned.

However, on the positive side, Knight writes Danaher has a high-growth and high-margin profile following the Veralto (VLTO) spin.

For example, after the Veralto spin, DHR will have ~34% EBITDA margins, 37% exposure to fast-growth bioproduction markets, and HSD/DD organic growth.

As a point of reference, the analyst adds that Thermo Fisher Scientific Inc TMO is estimated to have 26.4% EBITDA margins in FY24 with MSD organic growth.

Danaher was light in its core life science research product offering, and Abcam Plc ABCM deal gives it a world ~#2 position in research proteins, antibodies, and related recurring items.

Knight estimates Danaher will post ~$28.7 billion of revenue in FY23, representing a 9.3% organic decline, or 0.6% growth excluding COVID-19 headwinds.

In FY24, the analyst assumes revenue will reach ~$30.1 billion, representing 3.8% organic growth, or 6.8% excluding COVID headwinds.

The FDA, on pace to have a record year in 2023 approvals, may reduce investor doubt about early-stage funding, destocking, and industry growth, Knight adds.

Through September, 41 approvals have been granted compared to 42 in all of last year, notes the analyst. 

Plus, seasonality drives more late-year approvals, like the 15 approved in Sept. and Dec. 2022, and the all time record of 59 in 2018 seems within reach. 

In FY23, 15 biologic okays represent 37% of approvals, and the record of 20 biologics could be exceeded this year, Knight adds. 

Price Action: DHR shares are trading lower by 0.94% to $245 on the last check Wednesday.

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