Since 1990, Danaher shares have gone up by more than 100-fold. By comparison, Berkshire stock has “only” grown about 35-fold. The secret to the company’s success has been its ability to acquire companies in “dull” industries, then applying its “Danaher Business System” to maximize efficiency and profits.
Yet, despite this strong track record, investors have thrown out the baby with the bathwater in the wake of the novel coronavirus. What do I mean? Like the rest of the market, shares have pulled back from their all-time highs.
Yes, shares have partially bounced back from their 52-week lows. But, the markets are still mis-pricing DHR stock. Why? Wall Street still considers this company an industrial conglomerate.
However, it’s not fair to call Danaher an “industrial stock” anymore. The past decade has seen the company pivot toward healthcare and life science businesses. To top it all off, the company has spun off many of its legacy businesses as well.
In short, the recent selloff makes Danaher a solid buy. Now’s the right time to enter a position on the pullback, before shares bounce back to past highs.
DHR Stock Is a Defensive Play in an Uncertain Market
As I said above, Danaher shares sold off due to the coronavirus mayhem. The company may see some impact from the outbreak. Yet, much of its healthcare business could see tailwinds from the pandemic.
What do I mean? In 2016, Danaher acquired Cepheid. It was just one of the many medical testing businesses the company has acquired in recent years. What’s so special about Cepheid? They have developed a 45-minute test for Covid-19.
This alone may not be a big catalyst for DHR stock. Yet, it helps demonstrate why this company is no longer the manufacturer of fuel pumps and Craftsman tools it once was. In fact, many of these legacy businesses were sold or spun-off years ago.
So, what’s left? A collection of higher quality businesses across multiple industries. This includes not only life sciences and diagnostics, but product identification and water quality as well. Some on Wall Street are taking notice of Danaher’s transition. Recently upgrading the stock, RBC’s Deane Dray pointed to the company’s high-defensive portfolio as a key reason to buy.
In other words, DHR stock should perform relatively well in an economic downturn. With 70% of its revenue recurring, the company may see little earnings impact in a slowdown. Yes, much of this is already priced into shares. However, don’t let a premium valuation keep you away from this “flight-to-quality” play.
Danaher Stock and Valuation
Valuation is an issue with DHR stock. Shares are not “cheap.” Even after pulling back from all-time highs. The stock currently trades for 30.5 times projected earnings for 2020.
Yet, don’t let valuation scare you off this stock. Sure, shares sell at a premium valuation. But in today’s market, its current multiple could be justified. How so? This is a “flight-to-quality” play. With a strong balance sheet, high operating margins, and a portfolio of more recession-resistant businesses, this is the type of stock you want to own going into a downturn.
Sure, you can take a gamble and try to buy beaten down airline, restaurant or retail stocks. But, given how much uncertainty surrounds these hard-hit industries, it’s tough to tell whether you’re “bottom-fishing,” or falling into a “value trap.”
On the other hand, you can buy Danaher stock, albeit at a premium valuation. But, long-term, buying shares today could be a great entry point in hindsight. I am confident the company’s ability to acquire businesses, then maximize their profitability, will continue. For example, take the company’s recent purchase of General Electric’s (NYSE:GE) GE Biopharma unit.
Danaher is paying a pretty penny to acquire this business. Yet, based on their track record, chances are they can realize hidden value that its former parent failed to find. There’s a reason why GE recruited Danaher’s former CEO, and not the other way around.
Buy the Pullback in DHR Stock While It Lasts
Despite the company’s many strengths, Danaher shares have yet to get back to their high-water mark. Yet, as recent developments have shown, the company is no longer a conglomerate of dull, dirty businesses.
Instead, the company is a collection of high-quality, defensive businesses. Going into an economic downturn, this is the type of stock you want to own.
Despite a premium valuation, DHR stock is a standout buy in today’s market. Grab shares now, before they finish bouncing back from their recent selloff.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.