Life sciences and diagnostics company Danaher (DHR -0.65%) is one of the big winners of the pandemic. Its life sciences solutions help medical bodies develop vaccines and therapies for COVID-19, and its diagnostic tests help detect it. The stock is up 77% since the start of 2020, and its acquisition of General Electric's biopharma business in the spring of the same year was ideally timed. That said, what can investors expect from the stock in 2022?
Danaher is not a cheap stock on a conventional basis. The stock's full-year adjusted earnings per share of $10.05 and free cash flow (FCF) of $7 billion put it on a current price-to-earnings (PE) ratio of 27 times earnings and a price-to-FCF multiple of just below 28 times FCF.
While there's no set rule to these matters, these sorts of valuations are generally held by growth stocks, with, say, double-digit earnings growth prospects. Danaher has undoubtedly come from that place over the last couple of years. As you can see below, Danaher's core revenue growth (after the initial lockdowns in the spring of 2020) has soared since the pandemic spread internationally.
However, the question is whether Danaher can continue to grow at that rate to justify its valuation rating. It's a particularly pertinent question given the likelihood that the pandemic will ease in the future or become endemic.
Danaher's growth prospects
Management discussed future growth prospects during the recent earnings presentations. To address the matter, CEO Rainer Blair outlined his view that "we continue to see significant demand related to development and production of COVID-19 vaccines and therapeutics. And we expect this activity to persist longer term."
It's a view based on the perfectly rational assumption that the pandemic will transition into an endemic. In this case, there may be long-term demand for vaccines. Moreover, within life sciences, Blair said the non-COVID bioprocessing revenue grew in the "low double digits again this quarter." So, all told, the outlook is bright for the life sciences businesses, and for vaccine stocks in general.
Turning to diagnostics, it's a somewhat more mixed long-term outlook. On the positive side, Danaher's Cepheid expanded its GeneXpert Systems placement to 40,000 from 30,000 at the start of 2021, mainly due to demand coming from COVID-19 testing. It's a big deal because once Danaher expands its installed base of systems, it then has an opportunity to sell more of its cartridge tests (not just for COVID-19) to these new customers.
On a less positive note, Blair expects a decline in COVID-19-related testing to reduce tests from 60 million in 2021 to 50 million in 2022 and then 30 million in 2023. Of course, these are simply working assumptions, and they are subject to the variability of conditions around the pandemic. Nevertheless, it looks likely that there'll be some tailwinds in the diagnostics business in the coming years.
To reflect the nuance in Danaher's outlook, management decided to also give guidance in terms of "base business core sale growth." This is defined as revenue that includes activities entailing to COVID-19 vaccines and therapies but excludes revenues related to COVID-19 testing. The guidance for base business core sales growth for the first quarter and the full year is for "high single-digit growth," with core sales expected to grow at a mid-single-digit rate in 2022.
A stock to buy
Looking at the stock on a longer-term basis, the distinction between "core" and "base business core" (outlined above) could lead investors to price in, say, mid-single-digit revenue growth for the next couple of years and then a transition to high single-digit growth after that.
Throw in some margin expansion due to increasing sales of higher-margin cartridges and tests, and it's possible to get to the kind of double-digit earnings growth assumptions needed to justify Danaher's valuation.
That said, there are a lot of assumptions needed to get there, and it's hard to argue that Danaher is a buy in itself. But on the other hand, if the pandemic worsens, Danaher will act as a form of insurance policy for your portfolio. As such, it has a place in a portfolio of stocks otherwise exposed to a pandemic-related economic downturn.