After a relatively muted year in 2018, Danaher (NYSE:DHR) has turned in a remarkable performance in the markets this year. Specifically, shares of DHR are up nearly 50% year-to-date. Just as importantly, the life sciences specialist has found robust momentum late into the year under very impressive volume.
Of course, most of these gains are associated with Danaher’s acquisition of General Electric’s (NYSE:GE) life sciences business. As The Motley Fool’s Lee Samaha argues, the deal, while mutually beneficial for both organizations, substantially favors DHR stock. For GE, they get to divest in an asset to make their organization leaner and help reduce debt.
But for Danaher, the acquisition is a real shot in the arm for its own finances. In 2012, Danaher’s revenue jumped to nearly $18.3 billion. However, in the trailing 12-month period, the company is looking at $20.4 billion in top-line sales. That’s not exactly an impressive growth rate when the time to get there is accounted for.
However, with General Electric’s biopharmaceutical and pharmaceutical diagnostics businesses under DHR’s belt, the acquisition promises to revitalize the organization. Over the last several quarters, GE’s life sciences unit has witnessed strong growth. On the other hand, GE’s healthcare systems unit has started to go flat.
Following the details of the DHR-GE deal in General Electric’s most recent third-quarter earnings report, shares of Danaher jumped higher. In fact, since the close of Nov. 14, DHR stock has gained 11%. Further, volume almost hit the 74 million shares mark. Throughout most of the year, volume was in the low-millions level.
With all the enthusiasm toward DHR stock, should you buy in?
Danaher Must Prove Itself Beyond the Deal
Depending on your time frame and overall investment strategy, DHR will either appeal to you or it won’t. On one hand, not much is going wrong for the company. Aside from the slow revenue trend, Danaher consistently generates per-share profitability. Also, it generates strongly positive free cash flow, a metric that should improve even more with the GE unit acquisition.
Notwithstanding this deal, is there much to be excited about?
According to Deloitte’s outlook on the global life sciences industry, this year and the next several years represent transition. With technological advances becoming especially pronounced in this sector, this dynamic has opened doors for disruption. Smaller organizations are able to forward transformative technologies, forcing the old guard to respond.
Using Deloitte’s language, “Data is now the currency of life sciences.” In this regard, Danaher is taking the message of its core industry very seriously. For instance, GE’s life sciences unit has pioneered several innovations in molecular imaging. Further, many of these innovations are backed by data points collected over several years.
And as sector technologies improve, so will expectations for new and effective therapies. After all, the life sciences business isn’t just about compelling research; at some point, people need to see tangible results.
From the operational perspective, DHR’s deal with GE makes perfect sense. But from the investor’s point of view, this is a single albeit important catalyst. When the acquisition finalizes in 2020, the honeymoon phase will presumably end. Then, Danaher must start bringing home meaningful results.
Given how much DHR stock has jumped this year, though, it’s hard for me to imagine that shares will again have a banner year in 2020.
DHR Appropriate for Very Patient Investors
Don’t read the above wrong: I’m not suggesting that Danaher is a sell. Far from it. Merely, I’m addressing the point that while the buyout of GE’s life sciences unit is a net positive, when the deal closes, it will become very old news.
And while Danaher is getting a great deal on paper – perhaps a bargain – there’s a reason why GE sold: life sciences is a competitive field. Theoretically, DHR is better equipped to carry the inherent innovations forward, but it’s no guarantee.
As Deloitte pointed out, the industry is experiencing transformation and transition. Increasingly, next-generation technologies such as cognitive intelligence and blockchain have allowed smaller players to disrupt bigger ones.
Bottom line: Danaher must stay on its toes while delivering substantive results. With DHR shares having jumped so strongly in 2019, from a tactical perspective, I think waiting is the right move.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
