Danaher (DHR) reported better-than-expected earnings for the third quarter, as all three segments of the health technology company posted strong gains.

• Revenue rose 10% to $7.66 billion for the third quarter, well above Refinitiv estimates of $7.14 billion. That growth also outpaced the high-single-digit forecast reaffirmed at the company’s investor day in September.

• Earnings increased 7% to $2.56 per share, exceeding the consensus estimate of $2.25 per share.

Even when excluding the impact of declining Covid testing sales — but keeping in revenues from products that support vaccines and therapeutics — Danaher’s base business realized organic growth of 8.5%. In other words, the company isn’t overly reliant on pandemic-related sales. More impressively, management said disciplined cost management, productivity measures and raising prices helped expand core operating margin by 50 basis points. In this challenging environment, these are the recipes that should steam stocks higher.

Segment results

Danaher operates three segments: Life Sciences, Diagnostics, and Environmental & Applied Solutions.

Life sciences revenue of $3.78 billion edged out expectations of $3.77 billion, representing 8% core growth after adjusting for a 2.5% benefit from acquisitions and a 6.5% headwind from foreign exchange rates. Additionally, adjusted operating profit came in at $1.345 billion, up about 2% from the prior year’s period. Profit margin expanded 90 basis points (30 bps organic) to 27.7%.

• Management reported greater than 20% growth in the non-Covid businesses of Cytiva and Pall biotech as customers continued to transition away from Covid-19 vaccine and therapeutic programs and into programs for other modalities. That trend is expected to continue and result in high-single-digit core revenue growth for the bioprocessing business for the full year.

• As a result of this shift, management now expects to generate $800 million in Covid vaccine and therapeutic revenue, down from $1 billion previously with the non-Covid business offsetting that downward revision.

• The Life Sciences instrument business delivered double-digit base business core revenue growth with management commenting that “Funding levels remain strong globally and [they] saw solid customer demand across most major end-markets.”

Diagnostics revenue of $2.68 billion blew past the $2.16 billion consensus, representing solid 13.5% core growth. That’s after accounting for a 0.5% benefit from acquisitions and a 4.5% headwind from foreign exchange rates. Additionally, adjusted operating profit came in at $811 million, up 9% year over year, as the profit margin expanded 22.5 percentage points (+60 bps organic) to 28.4%.

• Driving the gains was 30% core revenue growth at Cepheid as the businesses respiratory testing revenue of about $875 million exceeded management’s expectations of roughly $325 million. The team credited the higher prevalence of circulating respiratory viruses and advanced purchases by customers in the northern hemisphere anticipating a tough cold and flu season.

Environmental and applied solutions (EAS) revenue of $1.21 billion came in ahead of the $1.16 billion expected, representing 10.5% core growth after adjusting for a 5.5% negative impact from foreign exchange rates. Additionally, adjusted operating profit came in at $297 million, up 9.6%, as the profit margin expanded 140 basis points (+135 bps organic) to 23.7%.

• During the reported quarter, management announced its intention to separate the EAS segment into an independent, publicly traded company comprised of Danaher’s Water Quality and Product Identification businesses. On the call, the team reaffirmed its view that as a separate company, EAS will have greater opportunities to meaningful deploy capital towards M&A. Additionally, the remaining business can better commit to “innovation and making a profound impact on Human Health.”

• Danaher forecast mid-teens growth in the water quality division and low-single-digit growth in product identification.

Guidance

Management expects overall core revenue growth to be flat to down low-single-digits for the fourth quarter. After adjusting for an expected “high-single to low-double digit” headwind related to a decline in Covid-19 testing sales, the team is forecasting base business core revenue growth to be in the high-single-digit percent range.

For the full year 2022, management continues to forecast base business core revenue growth in the high-single-digit percent range. However, management did increase its expected full-year core sales growth forecast to the high-single digit range (up from mid-single digit previously) thanks to strong Covid-19 testing performance in the third quarter. That’s better than the 5.9% full-year core revenue growth expected on the Street.

Bottom line

Despite putting up great numbers shares fell and traded much lower than before the print. We see this as a buying opportunity, not a reason to worry. From our analysis, the decline is due to broader concerns in the bioprocessing market. German competitor Sartorius said earlier that its business was slowing and inventory levels were high. In other words, customers stocked up on supplies and are now slowing the pace of orders (or canceling double orders).

On the call with investors, Danaher’s management said customers are indeed moving away from Covid-related projects, but are also refocusing efforts and spending to other areas that were put on hold during the pandemic. As a result, non-Covid bioprocessing (the non-COVID market is much larger) sales grew well over 20% in the quarter.

To be sure: Danaher isn’t immune to customers stocking up — investing heavily in therapeutic or vaccine programs during the pandemic, and not needing to order more in the immediate future. But management said many larger players that stocked up are also the ones best-positioned to redeploy those inventories to other projects. The team expects “inventory burn-down” with those players in the coming quarters.

Ultimately, this is a short-term issue. Any stocked inventory will be worked through and management said it is 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.