2 of our stocks get nice pops. Here's the news and what we think

Published Tue, Jan 10 20231:49 PM ESTUpdated Tue, Jan 10 20231:58 PM EST

As Wall Street on Tuesday attempted to hold onto recent gains, we received positive updates on two Club holdings that are seeing outsized moves to the upside: Danaher (DHR) and Constellation Brands (STZ). DHR 1Y mountain Danaher's 1 year stock performance Danaher is set to present at the JPMorgan Healthcare Conference on Tuesday afternoon. However, ahead of the event, on Monday evening, the life sciences and medical diagnostics company released its slide deck. In addition to providing a high-level look at what the company will look like after the separation of its Environmental & Applied Solutions business, it included an upward revision to fourth-quarter guidance. Shares jumped 4% on the positive revision. Some investors were concerned that management would preannounce weak earnings. Now, management sees core sales growth up in the high single-digit range. The increase can be largely attributed to better-than-expected performance in Cepheid's molecular diagnostics business, which did over $1 billion in respiratory testing revenue in the quarter versus prior guidance for about $375 million in sales on this front. Last month, as part of its better-than-expected third-quarter results , Danaher forecasted core sales would be flat to down low-single digits on a percentage basis in Q4. Base business core revenue growth guidance, which excludes sales related to Covid testing and includes sales from products that support Covid-related vaccines and therapeutics, was left unchanged, with expectations for a high single-digit increase. In addition to the core revenue growth revision, management is now factoring in no growth coming from Covid-related testing. Expectations had called for a high single-digit to low double-digit increase. The better-than-expected performance at Cepheid, along with the downward revision to the expected impact of Covid testing, may signal a faster-than-expected shift away from Covid-only tests toward Cepheid's best in class 4-in-1 respiratory test for Covid, Flu A, Flu B and RSV (Respiratory Syncytial Virus). The real concern for investors and what we'll be listening closely for when the company presents later Tuesday is on the bioprocessing front. As a reminder, analysts at Credit Suisse downgraded shares of DHR last week believing that "exposure to bioprocessing inventory reductions and diagnostics could pressure [Danaher's] growth relative to peers." We also highlighted this concern among investors in our analysis of the company's third-quarter earnings results, though noted that any elevated inventory levels were ultimately a short-term issue as they will ultimately get worked through. Management said it's working even more closely with customers now than they have in the past to better understand production plans and reduce the risk of overstocking and avoid double ordering. STZ 1Y mountain Constellation Brands 1-year stock performance;. Constellation Brands shares rose 2% on Tuesday after analysts at Goldman Sachs reiterated their buy rating, saying they "continue to believe concerns are overblown with regard to the health of the Modelo brand. Nielsen EQ volumes for Modelo Especial remained pressured in the latest Nielsen data (albeit improved on a 2-wk vs 4-wk basis), but this was broadly anticipated considering the amount of pricing recently put into the market across the value chain (from STZ up to and including retailers)." As a reminder, management also called out this price/demand dynamic on the earnings conference call , noting "the impact of our fall increases has been heightened by additional pricing actions across the value chain. That said, we expect an impact of incremental pricing will settle over the coming months as we have seen in prior similar circumstances." Put another way, demand appears to take a hit when prices increase because in anticipation of the price hike, everyone buys up cases and builds inventory; it then takes a little to digest that pull forward. Ultimately, things settle and historically Constellation's growth gets back on track after a few months. That's also expected to be the case this time, though it may take slightly longer as price increases were seen throughout the value chain, meaning the price to the end customer went a bit more than would normally be the case. California, a key state for Modelo, and Constellation's Mexican beer portfolio, which also includes Corona and Pacifico, is one example of where this impact was especially noticeable; Texas, too. However, as management noted on the call last week, California is already starting to rebound. Price impact aside, the Goldman analysts said Modelo continues to take market share, according to scanner data. It's hard to argue there's a trade-down to cheaper brands. Analysts are also encouraged by continued "positive feedback from our Beverage Bytes beer industry retailer contacts who indicate that Modelo Especial continues to perform well with sales remaining strong and growing." Ultimately, we agree with the analysts' take that concerns regarding Modelo are overblown — and as noted during Tuesday's"Morning Meeting," believe that investors must take into account the company's strong cash flow performance and be mindful that the company has yet to introduce the Victoria beer, one of the most popular brands in Mexico, to the U.S. market, providing for a positive catalyst in the future. (Jim Cramer's Charitable Trust is long DHR, STZ. See here for a full list of the stocks.) 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A trader works on the trading floor at the New York Stock Exchange (NYSE), January 5, 2023.

Andrew Kelly | Reuters