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Goldman Sachs Upgrades Danaher, Downgrades Waters

NEW YORK (GenomeWeb News) – Goldman Sachs on Monday upgraded shares of Danaher's stock, while it downgraded Waters' shares.

Analyst Isaac Ro upgraded Danaher to a Buy rating from a prior rating of Neutral and raised the 12-month price target on the company's stock to $88 from $75. He also downgraded Waters to a Neutral rating from Buy, and reduced the price target on its stock to $107 from $117.

For Danaher, Ro said that the company's stock has recently outperformed expectations on strong second and third quarter results. "While we have been on the sidelines awaiting M&A, we now believe outperformance will continue in 2014 given accelerating growth and the rising potential for EPS accretion via capital deployment," he wrote in a research report.

In particular, he is bullish about Danaher Life Science and Diagnostics segment, which includes AB Sciex and Beckman Coulter, saying he expects both businesses to continue gaining market share, "buttressed by a new product cycle … in 2014/2015."

He noted signs of stability in US academic spending, as well as a better outlook in Europe, and strength in China academic funding as potential tailwinds for AB Sciex, and added that Danaher has "elevated pharma exposure relative to peers.

"We believe this is a market in which [Danaher] is taking share as the company has pointed to continued adoption of the 6500 Triple Quad [mass spectrometer] despite potential headwinds from pharma consolidation," he said.

Ro also pointed to an article in Nature Medicine which highlighted AB Sciex's technology in a "breakthrough diabetes study."

Additionally, he said that after a years-long turnaround effort, "we believe the stage is now set for [Danaher] to leverage its investment in Beckman Coulter and reaccelerate growth above market growth rates"

The US Food and Drug Administration recently cleared Beckman Coulter's troponin assays for the company's Access and Dxl systems.

"In our view, these approvals are key tailwinds for 2014" and beyond, Ro said. "With a full menu now in place on both systems, we believe [Beckman Coulter] can regain share from lost customers and take share from incremental customers previously unserved" by the company.

Lastly, he said that Beckman Coulter is poised to launch a molecular diagnostic platform in Europe in 2014 with a US launch expected in 2015. The system will initially provide low-cost molecular blood screening, followed by tests for hospital-acquired infections and sexually transmitted diseases.

"While [Danaher's] molecular strategy is still nascent and we do not expect a significant contribution to near-term organic revenue growth, we see significant long term potential," Ro said.

Danaher does not have a first-mover advantage, he added, and building a "compelling menu of tests" will be challenging, but "these end markets are seeing steady vendor consolidation … and we view [Beckman Coulter] as a key beachhead from which their MDx strategy can expand [Danaher's] footprint in clinical testing labs."

In afternoon trading today, shares of Danaher on the New York Stock Exchange increased 1 percent to $75.42.

Meanwhile, Ro's downgrade of Waters comes just five months after he upgraded the firm's stock to Buy.

"While we continue to anticipate [Waters] could be an attractive M&A candidate, our Netural rating is based on continued top line and organic growth disappointment coupled with potential share loss in pharma end markets and the effects of a prolonged management transition," he wrote.

Waters is in the midst of finding a successor to Douglas Berthiaume as CEO. He announced his retirement in August, saying that he planned to step down from the firm sometime during the next two years.

Ro said that Waters' competitors in the pharma end market have outpaced the company, and noted Agilent, as well as Danaher and Thermo Fisher Scientific, as performing well in that end market.

In addition, he said that the firm's organic growth has been disappointing, missing Goldman Sach's estimates in the last two quarters.

"Given that [Waters] has not beaten consensus revenue estimates in the past seven quarters, we see execution as a key medium-term risk," Ro said.

Shares of Waters on the New York Stock Exchange were down 1 percent at $99.54 in afternoon trading today.

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