Unfortunately, the COVID-19 pandemic has persisted longer than everyone hoped it would, and the consequences of governmental reactions to it are still impacting the global economy. There are also the rise of coronavirus variants and the necessity of keeping isolation measures in place to consider, meaning that it's a good idea to start thinking about some "insurance plays" for your portfolio. One idea is life science tools and diagnostics company Danaher (DHR 0.76%). Here's how the stock can help a portfolio.
Why Danaher's sales soared
The pandemic artificially boosted demand for Danaher's diagnostic tests (which include coronavirus, flu, and respiratory viruses) and life science tools and equipment (also used to research coronavirus vaccines and therapies). As a result, the stock has had a great run (doubling since the start of 2020), and the fear is that once the pandemic subsides, investors will be left holding a highly rated stock just as it's about to witness a slowdown in sales.
Indeed, Danaher's sales have soared during the pandemic. Wall Street analysts typically see the company as growing core revenue in the high-single-digit range, but as you can see, the company's sales growth has been exceptional in the last five quarters.
That said, it would be a mistake to think that Danaher's growth in the period is just because of a one-time boost from the pandemic, which will subside quickly. There are three reasons for this.
1. The pandemic is still here
First, the pandemic has extended longer than many anticipated, and there's a greater level of sensitivity around health issues and viruses. That's not likely to disappear quickly. The trend can be seen in Danaher's recent third-quarter earnings presentations.
During the recent earnings call, CEO Rainer Blair said that Danaher would now enter 2022 with "approximately $2 billion in COVID-related backlog versus our previous expectation of $1.5 billion of backlog." The increase is a result of the need for booster shots and vaccination of children in the U.S. alone. Similarly, in clinical diagnostics, "we now expect to ship approximately 55 million tests in 2021 versus our prior expectation of 50 million."
2. Danaher's long-term growth prospects are enhanced by the pandemic
Not only did the pandemic boost Danaher's near-term growth prospects, it's also helped boost its long-term ones.
In diagnostics, sales of Danaher's platforms soared during the pandemic, driven by demand for its COVID-19 tests. That's a significant plus for Danaher because it creates new customers to purchase other Danaher tests for things such as sexual health, hospital-acquired infections, respiratory viruses, and flu tests.
In life sciences, the massive increase in funding for COVID-19 vaccines and therapies is likely to create medical breakthroughs, which will encourage more funding into biologic and genomic therapies and vaccines.
Indeed, Danaher is "making substantial investments to expand production capacity across our bioprocessing businesses and at Cepheid." For reference, bioprocessing is in life sciences, and Cepheid is a molecular diagnostics company Danaher acquired in 2016.
3. The Cytiva acquisition has been a huge success
If the Cepheid (diagnostics) acquisition was well-timed, then the Cytiva (formerly General Electric's biopharma business) acquisition is the healthcare deal of the decade. The deal looked like a great value when conceived in 2019, and it's become an even better one due to the pandemic.
The deal added Cytiva's expertise in cell isolation and cultivation to Danaher's existing strength in separation and filtration. Ultimately, Danaher now offers a comprehensive bioprocessing offering. At the time of the deal, Danaher thought Cytiva would be a business with a 6% to 7% core growth rate, but Blair now believes it will be in the "high single digits," and he believes Cytiva will continue to win market share from its rivals.
Is Danaher a buy?
Whichever way you look at valuations, Danaher is not a cheap stock right now, and its current torrid growth rates are not sustainable.
If the nightmare scenario happens that the COVID-19 pandemic extends into 2022 with more lockdowns to come, Danaher's earnings prospects will probably improve. As such, it's a valuable addition to a portfolio for investors looking for some downside protection and balance.