We're buying more of this life sciences stock after an earnings-driven decline

Published Tue, Oct 24 20239:27 AM EDTUpdated Tue, Oct 24 20239:49 AM EDT

We're buying 30 shares of Danaher (DHR) at roughly $199 each. Following Tuesday's trade, Jim Cramer's Charitable Trust will own 550 shares of DHR, increasing its weighting in the portfolio to 4.08% from 3.87%. Danaher reported a better-than-expected third-quarter Tuesday morning, but the stock is under pressure in early trading due to uncertainty around the recovery in its bioprocessing business. For the quarter, Danaher revenues fell 10.5% to $6.87 billion, beating estimates of $6.63 billion according to LSEG, while adjusted earnings per share declined 21% to $2.02, beating estimates of $1.87. The upside in the quarter was driven by better-than-expected results in Danaher's Diagnostic respiratory testing business, while Bioprocessing was in line with expectations and Life Sciences was a little weaker. For the full year, Danaher left its core revenue growth expectations unchanged, with the bioprocessing base business core revenue growth unchanged at down 10% while Life Sciences was tweaked lower to flat year over year versus low single-digit percentage growth and the testing business was revised higher. At first, the stock traded higher on the press release as the market found encouraging news about the no new cut to the Bioprocessing outlook. Recall, this business has been a victim of estimate cut after estimate cut because many customers built up too much inventory during the pandemic while others delayed projects to conserve capital as a result of funding pressure. However, when management explained some of the near-term dynamics it seeing in the industry, the stock started to slide. DHR YTD mountain Danaher YTD They key part of the earnings call was about bioprocessing order trends, and more specifically, the lack of an inflection point to growth. While Danaher reiterated its stance that this part of the business is troughing, bouncing along the bottom, and will return to growth in 2024, the cadence around orders was a disappointment. Danaher pointed out that its bioprocessing orders were down in the third quarter versus the second quarter and were expected to decline again in the fourth. We pay close attention to orders because they precede sales. Danaher's view that orders will decline over the next two quarters contrasts the upbeat data point its bioprocessing peer Sartorious said last week. Sartorius said its orders increased 15% sequentially in the third quarter, marking the first positive sequential order increase in five. But in the case of Danaher, it appears that its long-awaited order inflection point may be taking a little longer. Maybe Danaher is seeing something different or maybe management is being plain old conservative, but either way, the news sent shares lower in early trading. We are a buyer of this weakness because every quarter down gets us closer to the bottom, which is nearing. Stocks tend to bottom before their industry cycle does, and Danaher is almost there. Inventory dynamics may be plaguing Danaher now, but the outlook for biologics remains strong. Management explained on the call today that since 2018, underlying demand for biologics has grown at an average annual rate of approximately 10%. Even though customers are working through inventory, 2023 was an up year for the demand as well. And when you add in Danaher's upcoming $5.7 billion acquisition of Abcam, a leading producer of protein consumables, the company's long-term prospects look even brighter due to the accretive nature of the deal. Fourth-quarter and full-year outlooks include only Danaher's continuing operations. They exclude the impact from water and product quality company Veralto (VLTO), the DHR spinoff, which will report earnings after the closing bell on Wednesday. We kept the shares of Veralto that we received as owners of DHR stock. (Jim Cramer's Charitable Trust is long DHR. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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