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Is Danaher Stock a Buy?

By Lee Samaha - May 15, 2020 at 8:18AM

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The life sciences and diagnostics company is likely to see increased demand for its solutions after the COVID-19 pandemic has been contained.

Investors in life sciences and diagnostics company Danaher (DHR 0.53%) have enjoyed a relatively good 2020 so far, with the stock rising 4.4% compared to a 11% decline in the S&P 500 index. In addition, it's the top-performing stock within its peer group. That said, the company's first-quarter sales came in lower than initial guidance, and CEO Tom Joyce believes its second-quarter core revenue growth will come "flat to down 10%."

In this context, is Danaher a stock to buy?

A glowing digital stock price chart

Image source: Getty Images.

Danaher's first quarter

The following chart is useful to help explain exactly what's going on. Danaher's life sciences division (39% of profit in 2019) provides the tools for labs to research diseases and develop drugs, while its diagnostics segment (32% of profit in 2019) helps medical bodies to diagnose diseases, including COVID-19. The environmental & applied solutions segment (29% of profit in 2019) is a collection of water quality and product identification businesses.

In a nutshell, Danaher saw a marked deterioration in overall sales at the end of March, and as Joyce's estimate implies (see chart), it has continued through April so far as well. 

Danaher core revenue growth

Data source: Danaher presentations. YOY= year over year. Chart by author.

Life sciences and diagnostics

Focusing on the medical businesses, life sciences growth declined in the first quarter as the closure of labs caused them to defer spending on capital equipment. However, Danaher saw some COVID-19-related spending lead to strong growth at some of its life sciences business.

Diagnostics was a mixed bag, with Danaher's flu and COVID-19 tests helping Cepheid report 40% sale growth. Meanwhile, Radiometer, a business providing tests that help monitor critically ill COVID-19 patients, generated high-teens growth.

On the other hand, the shutdowns and containment measures imposed in China "resulted in very few patients going to hospitals for treatments or procedures" that "were not related to COVID-19, which greatly reduced core laboratory testing volumes," according to Joyce on the earnings call.

Danaher will bounce back

Of course, the first quarter only runs to the end of March, so the full impact of the shutdowns and COVID-19 containment measures in Europe and North America won't be seen until the second quarter -- hence the major drop-off in sales expectations, as shown in the chart above. This leads investors to the natural conclusion that if the COVID-19 pandemic is here to stay, then Danaher is not going to prove to be a recession-resistant stock after all. 

That said, it looks highly likely that Danaher will emerge as a company with enhanced long-term growth prospects after the pandemic is contained. After all, its diagnostic tests are key tools in understanding and controlling future outbreaks. Moreover, the damage caused by the COVID-19 pandemic will surely encourage more capital spending on research into vaccines and diseases, rather than less.

In addition, the usage of Danaher's COVID-19 test is helping to grow its installed base of equipment. This is important because Danaher operates a so-called razor-and-blade business model whereby installed equipment drives higher-margin consumables sales. So, for example, clinicians that bought equipment in order to run COVID-19 tests will be induced to run Danaher's flu test on the same equipment, now and in the future.

A research lab with various technicians at work

Danaher needs research labs to open again so purchases of its equipment and consumables will grow again. Image source: Getty Images.

Meanwhile, the biopharma business (now called Cytiva) bought from General Electric is off to a great start in 2020, with 10% revenue growth reported in the first quarter. As a reminder, Cytiva is a highly cash-generative business, and adding its free cash flow (around $1.3 billion in 2019) to Danaher's ($3.3 billion) will increase its financial firepower considerably. Also, its addition will allow Danaher to leapfrog Merck and become the leading player in the bioprocessing market

Time to buy Danaher?

Danaher's long-term prospects look assured, and Cytiva will add earnings and free-cash-flow growth to the business. Meanwhile, life sciences and diagnostics revenue is likely to improve strongly when the lockdown measures are eased. In this context, Danaher is an attractive stock for long-term investors.

That said, the recent rise probably isn't giving investors the best entry point into the stock, and the variance in the outlook for the second quarter suggests some stock price volatility ahead. The markets have been very volatile in 2020, so it probably makes sense to wait for a dip in Danaher's stock price before entering a long-term position.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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