Danaher (NYSE:DHR) stock is up nearly 48% in 2019. Even in a year in which just owning the S&P 500 (NYSEARCA:SPY) made investors a solid gain of 28%, Danaher has vastly outperformed the market.
But can Danaher continue its success in 2020? The past performance of Danaher indicates that the shares are a solid buy, but does that indicate they are a great investment today?
Danaher stock is one of Wall Street’s greatest conglomerate stories. Its success is due to Danaher’s management philosophy (the “Danaher Business System“, or DBS). Always on the prowl for “bolt-on” acquisitions, Danaher acquires companies in its target industries and uses DBS to make them more profitable.
This playbook has paid off big time for Danaher stock. But after its recent purchase of General Electric’s (NYSE:GE) Biopharma division, can Danaher repeat its magic?
Despite its high valuation, Danaher stock may be a great defensive play if the runaway bull market starts to taper off. Let’s dive in and see what’s in store for DHR in 2020.
The Secret of DHR’s Success
Danaher stock has a strong track record. While not as well-known as Warren Buffett’s Berkshire Hathaway (NYSE:BRK-A BRK-B), Danaher has outperformed Berkshire in the past five years. Danaher’s five-year cumulative return (excluding dividends) is 130%, versus 48.1% for Berkshire.
In contrast to Berkshire’s “hands-off” approach, Danaher has won big by actively improving the performance of its subsidiaries. After its success in more old-line industrial businesses, Danaher in recent years has pivoted towards high-tech industries. It is now focused on diagnostics, environmental, and life sciences companies.
Furthermore, Danaher has begun making big acquisitions as opposed to smaller transactions. In recent years, DHR has acquired Beckman Coulter, Pall, and other large enterprises. The $21.4 billion purchase of GE’s Biopharma unit is a continuation of that trend.
Will GE’s Biopharma Unit Move The Needle?
As InvestorPlace columnist Josh Enomoto pointed out in his Dec. 13 article, DHR’s acquisition of GE’s Biopharma unit has been the key driver of Danaher stock this year. Since 2018, DHR has had so-so top-line and bottom line growth. But in the wake of this deal, Danaher could deliver stronger earnings growth in 2020.
For next year, analysts, on average, expect the company’s earnings per share to climb 16.7% to $5.50.
However, this growth could already be priced into Danaher stock. Danaher trades at 27 times the average 2020 earnings estimate and has an enterprise value/EBITDA (EV/EBITDA) ratio of 23.7. Its peer, Thermo Fisher (NYSE:TMO), trades for a similar EBITDA multiple of 22.6. But TMO’s forward P/E ratio of 23.7 is cheaper than that of Danaher stock.
The high valuation of Danaher stock is no accident. The company’s movement towards Life Sciences has raised the multiple of Danaher stock. If DHR had stayed a purely industrial conglomerate like Illinois Tool Works (NYSE:ITW), Danaher’s shares would probably be trading closer to ITW’s 16.3 times EBITDA and forward P/E ratio of 22.4.
As a result of Danaher’s high valuation, I don’t anticipate the shares making another big move in 2020. But I do think Danaher stock will stay steady, as long as DHR meets analysts’ average expectations. But the company is also facing some risks.
Danaher Stock Could Be a Defensive Play
DHR stock is just a few dollars off its all-time high of $154.98 per share. Investors remain highly confident in the stock market, and Wall Street is bullish that this decade’s economic strength will spill into 2020.
However, things can look rosy before they turn bad. Things can always turn on a dime. In the midst of a frothy market, paying high multiples for stocks doesn’t look like a smart call.
Danaher stock trades at a high multiple. But its shares are fairly priced. And the stock could continue to perform well in tough times, since Danaher primarily owns companies in defensive industries. That means those businesses could perform well in a recession.
DHR stock won’t necessarily skyrocket during a recession. But during a correction, its shares should show greater stability than more speculative high-fliers.
The only wild card is the recent Biopharma acquisition. If Danaher faces headwinds applying DBS to its newest unit, expect Danaher stock to move lower as investors lose confidence in Danaher’s magic.
Wait for a Pullback Before Buying Danaher Stock
Driven by the Biopharma deal, DHR stock has been on fire in 2019. But at the shares’ current valuation, the opportunity from the deal appears to be priced into the stock. Yet, thanks to the company’s exposure to defensive industries, I don’t expect the shares to dive during a stock-market correction.
The best move may be to wait for such a correction. If DHR drops, investors can buy Danaher stock at a very affordable price. Barring material changes, DHR should rise meaningfully over the long-term. But waiting for a lower entry point could maximize investors’ long-term returns.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
