Danaher Stock: Buy at the High?

Just about everything went right with life science and diagnostics company Danaher's (DHR -1.82%) first quarter. The company easily beat its guidance, raised its full-year outlook, and provided evidence that it could continue to grow strongly even after the peak of the COVD-19 pandemic has passed. There's a lot to like about Danaher in 2021 and beyond. But, trading at an all-time high, is the stock a good value?

Danaher's bumper first quarter

Every once in a while, a company delivers a set of earnings showing a company firing on all cylinders. All revenue, both related and not related to COVID-19, was substantially ahead of expectations, and management raised its full-year guidance for both. A favorable margin mix and the benefit of the acquisition of Cytiva, the former General Electric biopharma business, led to a 186% increase in operating profit on the back of a 58% increase in revenue.

Image source: Getty Images.

Danaher's bumper first quarter

Danaher has been one of the big winners of the coronavirus pandemic. Its diagnostics segment provides COVID-19 tests, and its life sciences segment provides equipment and solutions for customers working on COVID-19 vaccines and therapies.

However, it would be a mistake to think of Danaher as simply benefiting from a one-off boost from the pandemic. As mentioned, management also raised its full-year guidance for its non-COVID-19-related revenue.

Data source: Danaher presentations. *100 basis points equals 1%.

Firing on all cylinders

Digging into the details by segment, we see that the standout performer was life sciences. COVID-19-related vaccines and therapies drove a 41.5% increase in core revenue (115% on a reported basis with the inclusion of Cytiva). Still, CEO Rainer Blair noted on the earnings call, "Excluding the impact of COVID-related activity, our underlying biopharma business grew in the low 20s range." 

Moreover, Blair said that the double-digit growth trend "we've seen over the last several quarters across non-COVID-related biopharma activity" was still in place. And the strength in COVID-19-related vaccines and therapies means management now expects Cytiva and Pall Biotech, its life sciences segment, to generate $2 billion in revenue in 2021, compared with a previous estimate of $1.3 billion.

Data source: Danaher presentations. Chart by author.

Core revenue grew 31% in the diagnostics segment, driven by surging demand for molecular diagnostics tests from subsidiary Cepheid. Blair outlined that half of the tests were for COVID-19-only tests, with the other half being the higher-priced 4-in-1 tests comprising COVID-19, flu, and respiratory virus tests. For a sense of the improvement in the outlook, management now expects to sell 45 million tests this year, compared with a previous estimate of 36 million.

Looking forward, the increased sales of life sciences equipment platforms is creating a long-term opportunity to sell more diagnostics tests, such as the 4-in-1, to new customers. Blair believes that patient volumes are now close to pre-pandemic levels, and consumables sales are "accelerating as a result."

Finally, the environmental and applied solutions segment is enjoying a growth rebound following the impact of the pandemic on capital spending on water treatment and product identification.

Danaher beyond 2021

The key question around the stock is not about 2021; it centers on 2022 and beyond. The lingering impact of the pandemic will ensure that Danaher's COVID-19 tests and research equipment will grow strongly this year. However, it will be difficult to trump these elevated demand levels in 2022.

The optimistic view would say that Danaher has significantly expanded its installed base of instrumentation platforms as a result of the pandemic. Also, the company has upside potential should children be vaccinated on a wide scale or a third booster jab is required. Furthermore, the level of investment in vaccine research may result in new vaccines produced in the future, and there's the possibility that the COVID-19 virus will become endemic.

Image source: Getty Images.

Danaher's non-COVID-19 sales are forecast to grow at a high-single-digit rate in 2021, and the preceding chart shows a history of mid-single-digit revenue growth. As such, it's reasonable to assume the company can grow at a mid-to-high-single-digit rate in the future, with ongoing margin expansion as higher-margin consumables sales expand.

Is Danaher stock a buy?

The company trades at 31 times expected 2021 earnings, but it won't be easy to significantly grow earnings in 2022, as Danaher will come up against elevated demand levels from 2021. Beyond that, it's reasonable to assume mid-single-digit revenue growth in the future.

All told, and in context, Danaher's valuation looks slightly undervalued, so while it may not be a raging buy, the stock can still provide a good return for investors. Moreover, if you're worried about the pandemic's lingering impact, buying Danaher stock offers a kind of insurance policy for a portfolio of stocks with exposure to the economy at large.