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Is Danaher Stock a Buy?

By Lee Samaha – Aug 22, 2020 at 7:45AM

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The health-focused company is having a very good year, and it has plenty of near- and long-term growth potential too.

Danaher (DHR -1.66%) is one of those stocks that seems unable to do any wrong, and it keeps going up and up while frustrated investors wait for a better entry point for this global healthcare, science, and technology conglomerate.

That past stock performance on its own is not a justification for buying the stock. On the other hand, if you feel confident that there's a high probability the stock will continue to appreciate over time, then why not just buy it?

With these questions in mind, let's look at whether Danaher is worth buying now or not.

The case for buying Danaher

Three key arguments behind buying the healthcare-focused company amount to:

  • The company has a number of near-term earnings catalysts that have the potential to surprise the market.
  • The COVID-19 pandemic has improved Danaher's growth prospects, as it benefits both from diagnostic testing and vaccine production.
  • The acquisition of General Electric's biopharma business has made Danaher a leading all-purpose bioprocessing company and added substantive growth prospects.
COVID-19 testing.

Efforts to stop COVID-19 are providing good growth opportunities for Danaher. Image source: Getty Images.

Near-term catalysts

Danaher has near-term earnings catalysts across all of its segments. Life sciences has been doing very well with COVID-19 research, but it's sometimes forgotten that a lot of non-COVID-related research facilities have been closed down as part of the social isolation measures. That's something that's negatively impacted capital sending on some of Danaher's instrumentation.

On the second-quarter earnings call in July, CEO Tom Joyce estimated that only "50%-60% of academic research labs in developed markets" were operating. As more of them open up, Danaher has the potential to play catch-up with instrumentation sales.

In diagnostics, Danaher's Cepheid subsidiary grew its core revenue by 100% in the second quarter, driven by its COVID-19 test and the instrumentation that runs it. A second wave of the pandemic could clearly boost growth, as it would lead to more extensive use of testing in order to contain the virus. In addition, many countries are only allowing travel from certain counties provided individuals get tested upon arrival.

Finally, in environmental and applied solutions (water quality treatment and product ID solutions), management says its equipment sales decline is "starting to moderate," and third-quarter core revenue is expected to be similar to that of last year's third quarter.

Danaher core revenue growth.

Data source: Danaher presentations. YOY= year over year.

Growth over the long term, too

Many of the points made above play into Danaher's long-term potential, too. For example, as Danaher expands diagnostic instrumentation sales due to COVID-19 testing, it has an opportunity to increase sales of its other tests to new customers that own its instruments. Indeed, the company recently announced a "4-in-1" test that tests for COVID-19, respiratory syncytial viruses, and the flu.

Meanwhile, Danaher's life sciences businesses are helping to create and eventually manufacture a vaccine. Danaher's Beckman Coulter subsidiary provides tools for vaccine research, and its Cytiva subsidiary (the former GE biopharma business) provides resins used for vaccine purification.

In addition to Cytiva's opportunity with COVID-19 vaccines, Danaher now has a long-term opportunity to cross-sell Cytiva's upstream (cell isolation and cultivation) bioprocessing solutions to its existing downstream (separation, filtration, and purification) customers, and vice versa.

Meanwhile, investors should not lose sight of the fact that Danaher has an excellent track record of increasing sales and margins at the businesses it acquires, and Cytiva has already made a strong start.

Is Danaher a buy right now?

Danaher is a high-quality company, and it's also having a strong 2020 already -- and for the reasons outlined above, its near-term growth prospects are set to improve in the third quarter. As such, don't be surprised if the company beats expectations again in the coming quarters.

That said, valuations still matter, and it's hard to make the case that, trading at 32 times its 2021 earnings estimates, Danaher is a great value right now. On the plus side, there's a strong case to be made that Danaher will "grow" into this valuation over time, and patient investors are likely to be rewarded. However, entry points do significantly influence returns, and cautious investors may want to wait for a better entry-level price into what is a very attractive company.

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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Danaher Stock Quote
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DHR
$273.44 (-1.66%) $-4.61

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