Danaher (NYSE:DHR) is not really an exciting company, but Danaher stock has been fairly reliable.
For the past decade, the average annual return was about 14.4% or so. However, as of this year, Danaher has come under pressure, falling about 16%. I think this could be an opportunity.
Interestingly enough, one of the perceptions of Danaher is that it is mostly an industrial conglomerate that is highly sensitive to the cycles in the economy, but the reality is something different. For the most part, the company has been undergoing a major transformation that has emphasized the healthcare industry.
Keep in mind that this week Danaher closed its $21.4 billion deal to acquire GE’s (NYSE:GE) Biopharma business. True, the valuation was far from cheap, coming to 17 times EBITDA.
Yet business is worth the premium. Note that GE Biopharma has an extensive business that involves areas like consumables, instruments and software that help with the research, discovery, development and manufacturing of therapeutics.
GE Biopharma is not a growth business. Consider that revenues are expected to increase by about 6% to 7% per year (revenues are expected to be about $3.2 billion). But the business is solid, involving multiyear contracts, that result in high margins and strong cash flows.
There is also synergy between the two. The company already has a life sciences business that has $6.5 billion in revenues from units like Beckman Coulter Life Sciences, Leica Microsystems, Pall, Molecular Devices and IDT. Danaher also has its DBS platform, which has advanced bioinformatics and analytics capabilities. This could unlock more opportunities from the GE Biopharma business.
The Long Game and Danaher Stock
Conglomerates usually underperform. There is often too much complexity and misallocation of resources. Just look at how GE has struggled over the years.
Danaher is the exception likely because the company has M&A in its DNA, going back to the 1980s.
A big part of the strategy has been to focus on continuous improvement within an organization. This goes back to the lean principles established by Toyota Motor (NYSE:TM).
Danaher has created its own flavor, though. It is called DBS (Danaher Business System). It is essentially about a methodology that integrates people, plans, processes and performance to get optimal results. Every day the question is always: “How can we make things better?”
With the DBS system, Danaher has been able to achieve robust margins. For example, during the latest earnings call, this is how CEO Thomas Joyce Jr. put it:
“The Danaher Business System continues to be the primary driver of our strong core operating margin performance and 2019 marked the fifth consecutive year that we expanded core operating margins by 70 basis points or more. Fourth quarter adjusted diluted net earnings per share of $1.28 were up double digits year-on-year, bringing full year adjusted diluted net earnings per share to $4.42. All in all, a strong finish to a very important year.”
Bottom Line on Danaher Stock
RBC analyst Deane Dray recently upped his rating on Danaher stock from “Hold” to “Buy” and increased his price target to $157. This implies a gain of about 15% from current levels.
“We have long viewed Danaher as a ‘break glass in case of emergency’ investment,” he said.
And I think he is spot on. Again, the company has a set of great assets with strong market positions. Another benefit is that about 70% of revenues are recurring. In other words, Danaher stock should be one of those that provides much-needed stability during a time of uncertainty.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.
