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Danaher to Gain From Solid Demand in Key Markets Amid Risks

Zacks Equity Research

On Mar 18, we issued an updated research report on Danaher Corporation DHR.

In the past three months, this Zacks Rank #3 (Hold) stock has rallied 27.8% compared with the industry’s rise of 17.4%.

Existing Scenario

Danaher believes that higher demand for innovative products is likely to continue driving revenues in the upcoming quarters. In this regard, elevated demand for the company’s popular product lines — that include Biomek i Series, iCELLis bioreactor system, DxH 520 analyzer, DxA 5000 and Beckman sample preparation platform — is likely to continue bolstering segmental sales. The company currently expects organic revenue growth of 4% for 2019.

Moreover, solid core revenue growth, improved operating income, benefits secured from effective implementation of the DBS as well as commercial initiatives like transformative marketing are likely to strengthen profitability in the forthcoming quarters. For instance, Integrated DNA Technologies, acquired in April 2018, is strengthening the Life Sciences segment.

Further, the company is improving its free cash flow on the back of greater operational efficacy. Notably, in 2018, the company’s free cash flow was $3.4 billion, reflecting year-over-year growth of 16.5%. Going forward, solid free cash flow generation will enable the company to effectively conduct its capital-deployment programs.

However, rising cost of sales is a major concern for Danaher. Notably, cost of sales jumped 7.2% year over year in the fourth quarter. Escalating costs (induced by tariffs and other factors), if unchecked, will continue to hurt margins in the quarters ahead.

Although Danaher is enjoying the positive impact of international operations, it is exposed to risks arising from unfavorable movements in foreign currencies and geopolitical issues. For instance, sales in the fourth quarter of 2018 were adversely impacted by 2% due to forex woes. Persistence of this headwind might be detrimental to Danaher in the upcoming quarters.

Stocks to Consider

Some better-ranked stocks from the same space include Carlisle Companies Incorporated CSL, Macquarie Infrastructure Company MIC and United Technologies Corporation UTX. While Carlisle sports a Zacks Rank #1 (Strong Buy), Macquarie and United Technologies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Carlisle delivered an average positive earnings surprise of 15.00% in the trailing four reported quarters.

Macquarie pulled off an average positive earnings surprise of 0.51% in the last four quarters.

United Technologies delivered an average positive earnings surprise of 14.87% in the trailing four quarters.

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