Danaher Poised To Deliver Continued Sales Growth, Says Argus

Argus maintains its Buy rating on Danaher Corporation DHR, saying the company is set to deliver continued mid-single-digit core sales growth, which, along with acquisitions and margin expansion, has the potential to drive double-digit earnings growth over time.

Recent Acquisitions And Spinoffs

Danaher, a blue-chip industrial company, "typically pursues acquisitions in niche markets with little competition, and drives improvement in operational efficiency and product quality through its 'Danaher Business System.'"

The company recently acquired Pall Corp., a water and air filter manufacturer, and has now separated into two independent companies — one with a focus on science and technology, and the other on Danaher's industrial businesses. In early July, Danaher spun off its industrial growth businesses into a new company called Fortive Corp FTV.

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"We believe the coming years will present a favorable environment for acquisitions, and expect Danaher to continue to streamline operations and boost margins at acquired companies," analyst John Eade wrote in a note.

Estimates, Expectations And Further Justification

Meanwhile, the analyst has cut the price target to $90 from $110 to reflect the spinoff.

This week, Danaher reported double-digit earnings growth for the second quarter. Non-GAAP adjusted EPS rose 17 percent to $1.25 and topped the consensus estimate of $1.23. Revenues of $5.8 billion rose 2 percent on a core basis and 17 percent including acquisitions. The core operating margin, however, fell 90 basis points to 17.9 percent.

For 2016, the company now expects EPS from continuing operations of $3.53–$3.60, compared to the pre-spinoff guidance of $4.85–$4.98. Danaher also issued third-quarter adjusted EPS guidance of $0.80–$0.84.

Argus' 2016 EPS forecast is now $3.58, near the high end of management's target range. It also set a 2017 EPS estimate of $4.11 (down from a pre-spinoff $5.50) and implying 15 percent growth next year. Argus' five-year earnings growth rate forecast is 12 percent.

Eade said DHR shares have shown relative strength recently, rising 10 percent over the past quarter while the S&P and the sector ETF (iShares Dow Jones US Industrial (ETF) IYJ) have risen 3 percent. At time of writing, shares of Danaher were down 0.51 percent to $80.71.

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