Life sciences and diagnostics company Danaher (DHR +1.03%) had a great 2019, and if the early indications for 2020 are anything to go by, investors can expect the same this year. The company has strong earnings momentum, and its stock should be considered as an option for investors looking for a defensive growth option. Let's take a closer look at what's going on.
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Why Danaher is doing well
Here are three reasons:
- CEO Tom Joyce's recent presentation at the J.P. Morgan Healthcare Conference saw him upgrade expectations for full-year 2019 growth and earnings.
- The deal to buy General Electric's (GE 1.51%) biopharma business looks like a great value.
- The ongoing evolution of the company's business model and the GE biopharma addition will enhance its growth potential and the quality of its earnings.
Recent commentary
Joyce's recent presentation was a continuation of a profitable trend in 2019 -- revenue and earnings have come in ahead of management's expectations. Management started its fiscal 2019 predicting full-year core revenue growth of 4%, only to raise expectations to 5.5% to 6.6% at the time of the third-quarter earnings in October. However, the guidance for only 4.5% core revenue growth in the fourth quarter was somewhat disappointing.
No matter -- the update at the conference in January saw Joyce forecasting that Danaher's core revenue growth in the fourth would come in at around 5.5% and earnings per share at, or above, the high end of its guidance range of $4.74-$4.77. In Joyce's words, Danaher had a "very good finish" to the year, driven by its life sciences and diagnostics, with particular strength at Pall (life sciences) and Cepheid (diagnostics). Note that these two businesses are relative newcomers to the company -- Pall was acquired in August 2015 and Cepheid in November 2016 -- and their operational outperformance is testimony to Danaher's ability to improve the earnings potential of its acquisitions.
Indeed, Joyce also outlined that Cepheid's revenue had grown from around $600 million at the time of the acquisition to around $1 billion today, with operating margin up to 20% from low single digits previously, a hugely impressive result.
The GE biopharma deal will add growth
Investors will be hoping that Danaher's management can continue its golden track record of success in integrating acquisitions. Beckman Coulter (life sciences & diagnostics), Cepheid, and Pall have all been big winners for the company.
Provided the GE biopharma deal gets approved -- Joyce expects it will be completed by the end of March -- there's good reason to believe it will substantially enhance Danaher's prospects. For example, Danaher is currently generating around $3.3 billion in free cash flow, and GE's biopharma business generated $1.1 billion in 2018 alone.
The deal makes good sense, and at a price of around 18 times free cash flow, it looks like a very good value for Danaher shareholders.
Danaher's business evolution
The two businesses are also a good complementary fit, with Danaher's strength in filtration being augmented by GE biopharma's chromatography, single-use equipment, and resins. Given that 70% of Danaher's sales now go directly to the market -- meaning the company has much more opportunity to interact with the end user -- the company has the opportunity to offer a single source of solutions to bioprocess customers.
Not only is Danaher increasingly selling to customers on a direct basis, but it's also increasing the amount of its revenue from high-margin recurring sources. During the recent conference, Joyce outlined how Danaher was only generating 45% of its revenue from recurring sources five years ago. Now, that ratio is closer to 70%. This is good news, because it means the healthcare company's earnings are likely to be much more stable in an economic slowdown.
The GE biopharma segment is only going to help in that regard because its share of recurring revenue from consumables is actually higher than Danaher's, at around 75%. Throw in Danaher's proven ability to improve the profitability of the businesses it acquires, and the future looks bright for the company.
Danaher is on a good track
All told, Danaher is ending 2019 on a strong note and the likelihood is 2020 will be another good year. The life sciences and diagnostics market has demonstrated it can continue to grow at a mid-single-digit clip during a slowdown in the industrial economy, and there's no reason why it can't do the same in 2020.
