Danaher Earnings: COVID-19 and Other Headwinds Cut Into Profits and 2023 Outlook

Narrow-moat Danaher DHR turned in weak first-quarter results relative to a tough comparable period a year ago when the omicron variant was surging, and management reduced its 2023 outlook moderately. However, we think our 2023 cash flow assumptions remain appropriate, and we do not anticipate changing our $242 fair value estimate materially based on this announcement.

In the first quarter, revenue declined 7% (down 4% on a core basis in constant currency and organically) while adjusted EPS declined 14%. This top-line performance included significant declines in former high-flying businesses. Specifically, the new biotechnology segment, which provides bioproduction tools for drug makers and benefited from COVID-19 vaccine production in recent years, declined 13% on a core basis, including inventory destocking at customers and more cautious buying from emerging customers in the wake of recent financing concerns. In diagnostics, which benefited from COVID-19-related testing in recent years, declined 7% on a core basis. Life sciences (up 5% on a core basis) reflected ongoing growth in initial research and development activities. Additionally, the environmental and applied solutions segment (now called Veralto) is pending divestiture and grew 7% on a core basis. With margins contracting mainly on negative operating leverage as sales fell, adjusted EPS declined in the midteens.

For 2023, management reduced its outlook slightly. Now, including double-digit declines in COVID-19-related sales and mid-single-digit growth in its non-COVID-19 business, Danaher expects a core revenue decline in the high single digits (down from a mid-single-digit decline previously). Operating margins, which have been inflated during the pandemic, may decline as well, causing adjusted EPS to fall even further. We think a low-double-digit earnings decline is likely in 2023. However, beyond 2023, Danaher will likely return to more normal growth patterns, including low-double-digit earnings growth.