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Will Earnings Streak Be Alive for Danaher (DHR) in Q3?

Zacks

Danaher Corp. DHR is set to report third-quarter 2016 earnings results before the opening bell on Oct 20.

Last quarter, the company posted a positive earnings surprise of 14.7%. Danaher has a decent earnings surprise history, beating estimates three times over the trailing four quarters. The stock has an average positive surprise of 5.1%.

This is Danaher’s first earnings release since it completed the spin-off of Fortive Corp. on Jul 2. The spin-off was announced in second-quarter 2015. Post spin-off, Danaher has reorganized its business into four segments, namely Life Sciences & Diagnostics, Dental, Environmental and Applied Solutions.

Let's see how things are shaping up for this announcement.


Factors to Consider

Danaher’s tried and tested business model – the Danaher Business System (‘DBS’) – has proved to be the fundamental growth driver, fueling revenue, margins, cash flow and earnings improvement. This is especially designed to boost business performance in the critical areas, including service quality, delivery, innovation and cost reduction. We believe that DBS will act as a strong catalyst for both Danaher’s organic and inorganic business lines. This will supplement the company’s key financials during the third quarter.

We perceive that the company’s healthcare and dental portfolio, which have been its major profit churners, will be able to pursue meaningful growth opportunities, post the Fortive spin-off. Positive industry trends, such as rise in aging population, increased spending on healthcare and fitness as well as favorable regulations from the Chinese Food and Drug Administration, are expected to bolster the healthcare portfolio’s growth.

In turn, this will supplement Danaher’s top-line performance for the quarter to be reported. Brands like Leica Microsystems, CytoFLEX and SCIEX are likely to act as key money spinners.

Danaher’s strategic product launches and solid traction of existing products are also estimated to drive sales growth. Some of the notable product launches include the introduction of molecular diagnostic platform, VERIS; new menu additions, including vitamin D and AMH fertility test in the Beckman Coulter business, and TCM5 FLEX launch under the Radiometer business. We believe that product launches in the Diagnostics platforms will boost the company’s third-quarter figures.

Furthermore, Danaher’s acquisitions have acted as another important growth driver. During the first six months of 2016, the company closed six bolt-on acquisitions for $105 million. In the second quarter, the previously completed buyouts contributed 15% to Danaher’s revenue growth. We believe that strategic acquisitions will aid the company reap significant synergies going ahead.

Despite these positives, Danaher has been grappling with multiple macroeconomic issues that may hurt its third-quarter results. For instance, economic weakness across the globe, especially uncertainty in Latin American and some European regions like Russia and the Middle East, pose as major headwinds for the company. Moreover, softness in key industrial markets has been severely affecting the company’s business. It can continue to thwart top-line growth for the quarter to be reported.

Of late, Danaher has also been facing the heat of channel de-stocking in the U.S. and the Middle East. This trend is anticipated to continue in the future as well and jeopardize the company’s dental business. These apart, foreign currency fluctuations also play a spoilsport for Danaher. In addition, stiff competition and increasing consolidation in the industry add to the company’s woes.

Moreover, some of Danaher’s leading brands, including Fluke, Qualitrol, Tektronix, Gilbarco Veeder-Root, Kollmorgen and Matco Tools, became a part of Fortive during the spin-off. Absence of revenues from these brands and other costs of the separation are likely to affect the company’s third-quarter results significantly.

Earnings Whispers

Our proven model does not conclusively show that Danaher will beat earnings estimate in this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) for this to happen. This is not the case here as you will see below:

Zacks ESP: The Earnings ESP for the company currently stands at 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 82 cents.

Zacks Rank: Danaher’s Zacks Rank #3, when combined with a negative ESP, lowers the predictive power of ESP and makes surprise predictions difficult.

Note that we caution against Sell-rated stocks (Zacks Rank #4 or 5) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

DANAHER CORP Price and EPS Surprise

DANAHER CORP Price and EPS Surprise | DANAHER CORP Quote

Stocks That Warrant a Look

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Macquarie Infrastructure Corp. MIC has an Earnings ESP of +18% and a Zacks Rank #2. The company is scheduled to report results on Oct 31.

Live Nation Entertainment, Inc. LYV has an Earnings ESP of +6% and carries a Zacks Rank #1. The company is slated to release results on Nov 3.

Amazon.com Inc. AMZN has an Earnings ESP of +6.98% and a Zacks Rank #1. The company is slated to report earnings on Oct 27. You can see the complete list of today’s Zacks #1 Rank stocks here.

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