Investors decided the good outweighs the bad with Danaher, says Jim Cramer

Danaher Stock Analysis: A Deep Dive

Key Concepts:

• Conglomerate performance
• Post-pandemic recovery
• Supply chain issues
• Biotech IPO market impact
• China's economic influence
• Earnings reports and guidance
• Bioprocessing segment
• Monoclonal antibodies
• Volume-based procurement
• Investor sentiment and market reaction

Danaher's Recent Struggles and Potential Turnaround

For many years, Danaher was considered a top-performing conglomerate, delivering over 1,000% returns in 20 years. However, post-pandemic, the stock has faced challenges. The speaker bought the stock in early 2022, anticipating a rebound, but various factors hindered its progress.

Challenges Faced:

• China's Slow Recovery: Slower than expected economic recovery in China impacted Danaher's business.
• Excess Inventory: Customers over-ordered during the supply chain crisis, leading to excess inventory and reduced demand for new equipment.
• Tepid IPO Market: Fewer biotech IPOs meant fewer new drug companies with funds to invest in Danaher's equipment.
• Trump's Tariffs and NIH Cuts: Tariffs and spending cuts to the National Institutes of Health reduced funding for life sciences equipment.

Despite being historically well-managed, Danaher has faced repeated setbacks, leading to frustration.

Q2 Earnings Report: A Roller Coaster

The speaker was concerned about Danaher's Q2 earnings, even selling a small portion of their holdings as a precaution. The initial reaction to the earnings report was negative, with the stock plummeting despite seemingly positive results.

Positive Aspects of the Report:

• Revenue Beat: The company reported healthy revenue figures.
• Steady Organic Growth: Demonstrated consistent growth in core business areas.
• Better-than-Expected Margins: Improved profitability.
• Earnings Beat: Reported earnings of $1.64 per share, $0.16 above expectations.
• Raised Full-Year Forecast: Management increased their earnings forecast for the year.
• Healthy Guidance: Provided positive guidance for the current quarter.

Despite these positives, the stock initially declined, causing confusion and concern. The speaker considered potential reasons for the negative reaction, including concerns about China, the CFO's retirement announcement, and the possibility that investors were disappointed that Danaher only raised full year earnings forecast, not taking up the revenue numbers even though they reported revenue beat.

Market Correction and Positive Outlook

After the initial negative reaction, the stock rebounded, eventually closing up 1% on Tuesday and experiencing a significant rally of 4.2% the following day, followed by another 2.5% increase. This positive correction occurred as investors digested the earnings report and recognized the underlying strengths of the company.

Key Positives Identified:

• Biotechnology Segment Strength: The biotechnology segment, with the highest margins, reported 8% sales growth and a 150 basis point operating margin expansion.
• Bioprocessing Recovery: The bioprocessing division, a $6 billion business, showed signs of recovery with positive order trends.
• Monoclonal Antibody Success: Monoclonal antibodies represent over 75% of bioprocessing unit sales.
• CEO's Optimism: The CEO stated that order activity supports high single-digit core growth in the second half and believes bioprocessing can maintain this growth long-term.

China Concerns and Volume-Based Procurement

Despite the overall positive outlook, concerns remain regarding Danaher's exposure to China. Sales in China were down mid-single digits due to volume-based procurement and reimbursement changes implemented by Chinese authorities. This issue also affected Abbott Labs.

Volume-Based Procurement: This is a national strategy in China to curb healthcare costs, impacting the diagnostics business.

Conclusion and Investment Recommendation

While Danaher is not without its challenges, particularly in China, the speaker believes the company has reached a tipping point. The rebound of the bioprocessing business is a key positive indicator. Therefore, the speaker is maintaining their position in the charitable trust and recommends considering buying the stock.

Key Takeaway: Despite recent struggles, Danaher's core business is showing signs of recovery, making it a potentially attractive investment.

Additional Points

• The speaker mentions waiting for UnitedHealth's report before making any moves on Cigna.
• The speaker also mentions Honeywell and Dover, suggesting that they might face similar market reactions during earnings season.