As Wall Street tried to hold onto recent gains on Tuesday, we got positive news on two club holdings making outsized moves higher: Danaher (DHR) and Constellation Brands (STZ). DHR 1Y Mountain Danaher’s 1-year stock performance will be presented by Danaher on Tuesday afternoon at the JPMorgan Healthcare Conference. However, in the run-up to the event, the life sciences and medical diagnostics company released its slide deck on Monday night. It included an upward revision to fourth-quarter guidance, along with an overview of how the company will look after the separation of its Environmental & Applied Solutions business. Shares rose 4% on the positive revision. Some investors feared management would announce weak earnings. Now management sees core business revenue growth in the high single digits. The increase is largely due to the better-than-expected performance of Cepheid’s molecular diagnostics business, which generated over $1 billion in breath testing revenue for the quarter versus a previous guidance of about $375 million in revenue on that front. Last month, Danaher forecast a flat to low single-digit percentage of core sales for the fourth quarter as part of better-than-expected third-quarter results. Core business core revenue growth guidance, which excludes sales related to Covid testing and includes sales of products supporting Covid-related vaccines and therapeutics, was left unchanged, with a high-single-digit increase expected. In addition to revising core revenue growth, management now excludes growth from Covid-related testing. Expectations had called for high single-digit to low double-digit growth. Better-than-expected performance at Cepheid, coupled with the downward revision in expected impact of Covid testing, could signal a faster-than-expected shift away from Covid-only testing towards Cepheid’s best-in-class 4-in-1 breath test for Covid, Flu A, Influenza B and RSV (Respiratory Syncytial Virus). The real worry for investors, and what we’ll be listening to closely when the company presents later Tuesday, is on the bioprocessing front. As a reminder, analysts at Credit Suisse downgraded shares of DHR last week on the belief that “exposure to inventory reductions and bioprocessing diagnostics could weigh [Danaher’s] Growth relative to peers.” We also highlighted this concern among investors in our analysis of the company’s third-quarter earnings results, but noted that elevated inventories were ultimately a short-term concern as they will eventually be worked off. Management said it is now working even more closely than in the past with customers to better understand production schedules and reduce risk of overstocking and avoid double orders.STZ 1Y Mountain Constellation Brands 1-Year Stock Performance. Shares in Constellation Brands rose 2% on Tuesday after analysts at Goldman Sachs reiterated their buy rating, saying they “continue to believe concerns about the health of the Modelo brand are overdone. Nielsen EQ volumes for Modelo Especial remained under pressure in the latest Nielsen data (despite improving on a 2 week versus 4 week basis), but this was generally expected given how many prices have been up recently across the value chain (from STZ to and including retailers).” As a reminder, management also noted these price-demand dynamics on the earnings call, noting that “the impact of our fall increases reinforced by additional pricing measures throughout the value chain. However, we expect the impact of the price increases to materialize in the coming months, as we have seen in previous similar circumstances.” In other words, demand seems to take a hit when prices rise because in anticipation of the price increase, everyone buy cases and build inventory; it then takes a little time to digest this thrust. Things eventually settle down, and Constellation’s growth is historically getting back on track after a few months. This is likely to be the case this time as well, although it may take a little longer. Price increases have been seen across the value chain, meaning the price to the end customer was slightly higher than it would normally be. California, a key state for Modelo, and Constellation’s Mexican beer portfolio, which also includes Corona and Pacifico, is one example of where this impact has been particularly noticeable, including in Texas. However, as management noted on last week’s earnings call, California is already starting to recover Price impact aside, the Goldman a analysts said Modelo continues to gain market share, according to scanner data. It’s hard to argue that there’s a trade-off to cheaper brands. Analysts are also encouraged by the continued “positive feedback from our contacts with our Beverage Bytes beer industry retailers, indicating that Modelo Especial continues to perform well and sales remain strong and growing.” Ultimately, we agree with analysts that concerns about Modelo are overblown – and as mentioned during Tuesday’s “morning” meeting, we believe investors need to take into account the company’s strong cash flow performance and consider that the Company yet to implement this has brought Victoria beer, one of the most popular brands in Mexico, to the US market which is a positive catalyst for the future. (Jim Cramer’s Charitable Trust is Long DHR, STZ. For a full list of shares, click here.) 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A trader works on the floor of the New York Stock Exchange (NYSE) on January 5, 2023.
Andrew Kelly | Reuters
As Wall Street tried to hold on to recent gains on Tuesday, we got positive news on two club holdings that are making outsized moves higher: Danaher (DHR) and constellation marks (STZ).
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