GE Stock – Is Danaher Stock a Buy?
Life sciences and diagnostics company Danaher (NYSE:DHR) is one of the very few companies that has benefited from the COVID-19 pandemic. Its diagnostic tests detect the virus, and its life sciences tools help customers research and develop vaccines and therapies. As such, Danaher will have another solid year in 2021 — but what lies beyond the pandemic? Here’s what you need to know before buying the stock.
Danaher’s surprisingly strong year
The tale of Danaher’s past year is in the chart below. After the pandemic spread out of China, the company took an initial hit in the second quarter, only to recover strongly as life sciences and diagnostics revenue soared through 2020 and into 2021. Meanwhile, core sales in the environmental and applied solutions segment (a collection of water treatment, inkjet printing, and color management solutions) showed positive growth again with the improving economy.
That all added up to a great 2020 for the company. And buoyed by the addition of Cytiva (the former GE biopharma business), Danaher reported a whopping 24.4% increase in reported sales. Moreover, Danaher is forecast to have another great year. Management is forecasting core revenue growth in a high-teens percentage, and Wall Street analysts forecast a near-25% increase in reported sales for 2021.
However, what about 2022 and beyond? It’s a legitimate question to ask given that the pandemic is abating and the stock trades at 28 times estimated 2021 earnings.
There are three reasons to feel optimistic about Danaher in 2022. First, if you look closely at the chart above, you can see that the last time Danaher reported core revenue growth below a mid-single-digit rate was in the fourth quarter of 2017. Moreover, up until the second quarter of 2019, Danaher had a now-divested dental business that reduced the overall growth rate. On this basis, it’s reasonable to expect Danaher can maintain an underlying growth rate in the mid-single digits even after the pandemic is over.
Second, management outlined that Danaher’s non-COVID-related sales are on track for core revenue growth in the high-single digits. While this is partly a consequence of a snapback in growth in the environmental and applied solutions businesses, it also reflects higher spending on non-COVID-related research and development by medical bodies.
Third, the COVID-19 pandemic is likely to have enhanced Danaher’s long-term growth rate. The company’s business model involves selling life sciences equipment and diagnostic testing platforms to customers and then generating recurring revenue through the sales of consumables and tests.
Indeed, a large part of the company’s success story has come from management’s ability to acquire businesses and increase the acquired companies’ profit margins by increasing the share of sales coming from recurring revenue sources.
With this in mind, it’s clear that the instrumentation and platform sales have significantly expanded Danaher’s installed base of equipment, and now the company has an opportunity to increase higher-margin consumables sales to its new customers. One example of this comes from the Cepheid diagnostics business.
CEO Rainer Blair discussed Cepheid on the first-quarter earnings call, saying, “Roughly half of the tests shipped were COVID-only tests, and the other half were 4-in-1 combination test for COVID-19, Flu A, Flu B, and RSV.” In addition, Blair said, “We also saw increasing demand for nonrespiratory tests across Cepheid’s market-leading test menu, including sexual health, hospital-acquired infections, and urology.”
In addition, the surge in investment in vaccines and therapies is likely to create new sources of demand for life sciences equipment in the future. Meanwhile, the widescale adoption of a third vaccine shot will boost Danaher’s revenue growth in 2022.
Is Danaher a buy?
One way to look at it is to consider 2021 earnings as a kind of “ground zero” base on which to value the company from now on based on mid-single-digit revenue growth. For example, analysts have Danaher closing 2021 on a price-to-earnings ratio of nearly 28, a price-to-free-cash-flow ratio of 27.5, and an enterprise value (market cap plus net debt) to earnings before interest, taxation, depreciation, and amortization (EBITDA) ratio of 20.
Those valuations are generally below what Danaher traded at before the pandemic hit.
Meanwhile, Danaher still has some upside potential from the application of a third vaccine shot and widescale vaccination of children. In addition, the stock should arguably trade at a higher valuation than before the pandemic because its long-term earnings potential is higher now due to the new instrument placements and customer relationships. On balance, the stock looks slightly undervalued.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Fintech Zoom premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.