Life sciences and diagnostics company Danaher (DHR 2.56%) is likely to have a great year, but what about 2022 and beyond? That's the key question that investors will be asking themselves after yet another excellent earnings report from the company. Let's take a look at the earnings and guidance in assessing the investment case for the company.
Another strong year
With full-year headline revenue up 24.5% and core revenue (including the Cytiva biopharma business bought from General Electric) up 9.5%, Danaher had another super year. Revenue growth was driven by the Cytiva acquisition (life sciences) and by a boost in demand from the COVID-19 pandemic. Danaher's life sciences segment was a beneficiary of spending on developing vaccines and therapies for COVID-19. Meanwhile, the diagnostics segment benefited from demand for its COVID-19 tests and associated flu tests.
Image source: Getty Images.
It all added up to a 29.4% increase in operating profit in 2021 to $4.2 billion. You can see the breakout of profitability by segment below. Note that in the environmental and applied solutions segment (water quality treatment and product ID solutions), profits declined in 2020 as a consequence of customers holding back purchases in light of the pandemic. I'll come back to this point later.
|
Danaher Segment Operating Profit |
2018 |
2019 |
2020 |
|---|---|---|---|
|
Life sciences |
$1.229 million |
$1.401 million |
$2.054 million |
|
Diagnostics |
$1.074 million |
$1.134 million |
$1.538 million |
|
Environmental applied solutions |
$988 million |
$1.052 million |
$979 million |
Data source: Danaher presentations.
The performance marked an outstanding year, where sales bounced back strongly from an initial slowdown in the second quarter caused by the early impact of the pandemic spreading from China.
Data source: Danaher presentations. YOY = year over year. Chart by author.
Danaher's guidance
Management expects the double-digit growth momentum to continue into the first quarter and full year of 2020. For reference, 100 basis points are equal to 1%. So if you think about the full-year core revenue guidance of "low-double-digit" growth as being, say 10%-13%, then the 500 basis points from COVID-19 related revenue equates to 5% growth from the 10%-13%. It follows that the remaining 5%-8% would come from the non-COVID-19 related revenue -- indeed management refers to it "mid to high single-digit" growth.
The important point to note here is that the guidance implies that non-COVID-19 related growth will pick up in the second half as the economy opens up. That's a positive because it implies that Danaher can continue along the mid to high single-digit revenue growth path even after the COVID-19 pandemic has subsided.
|
Core Revenue Growth Guidance |
First Quarter Growth |
Full Year Growth |
|---|---|---|
|
COVID-19 related |
1,300 basis points |
500 basis points |
|
Non-COVID-19 related |
Mid-single-digit |
Mid to high single-digit |
|
Total |
Mid-to-high teens |
Low-double-digit |
Data source: Danaher presentations.
What about 2022?
All of this leads to the key question put at the start, namely what kind of growth can investors expect in the future from Danaher? It's an especially important question because the company's valuation is historically expensive, even if you price in the increase in earnings for next year. This chart compares enterprise value (market cap plus net debt) to earnings before interest, taxation, depreciation, and amortization (EBITDA), a commonly used valuation technique.
Data by YCharts
Investors are hoping that the environmental and applied solutions segment will see a bounce in growth in 2021 and beyond as utilities' spending on water treatment improves from the pandemic. Moreover, the non-COVID-19 related revenue appears to be recovering toward at least the mid-single-digit range it was in before the pandemic hit.
In addition, on the earnings call CEO Rainer Blair pointed out that a lot of the life sciences COVID-19 related spending has involved a pull-forward of investment that biotech companies were going to make anyway, and in making it the biotech companies are now "looking at new vaccine technologies to get at diseases where we've yet to develop vaccines."
Image source: Getty Images.
Meanwhile, the diagnostics segment can benefit from taking advantage of all the new installed systems customers bought to run Danaher's COVID-19 tests. The opportunity is to sell new tests to the new system holders.
For example, Danaher has already ramped sales of its four-in-one (COVID-19, flu A, flu B, and respiratory syncytial virus) test such that it now constitues 60% of its COVID-19 tests. For reference, the four-in-one test cost is roughly double that of the COVID-only test.
Is Danaher a buy?
Wall Street analysts have Danaher growing revenue at 15.5% in 2021 and then returning to 6.3% in 2022. Those look like fair assumptions based on management's guidance and the growth opportunities discussed above. At this point, investors have to decide if they want to buy the stock on a 2022 EV/EBITDA valuation of nearly 23 for a company growing revenue in the mid-single digits.
Frankly, Danaher looks fairly priced at these levels, meaning returns aren't likely to be stellar unless a new growth catalyst appears, or the COVID-19 pandemic last longer than most anticipate.
However, if you are worried that the impact of the pandemic will extend into 2022 and beyond, with a greater awareness around the need for investment in diagnostics and life sciences, then there's a good case for buying the stock. It can also act as a kind of insurance policy for investors holding a lot of stocks with exposure to the economy at large.
