Danaher's (DHR 0.60%) mix of life sciences and diagnostic businesses made it one of the big winners from the pandemic. Its status as one of the go-to options for investors looking for portfolio protection from a resurgence of the pandemic has never been in doubt. Its life sciences tools help medical bodies research vaccines and therapies (including COVID-19), and its diagnostics tools test for medical conditions, including COVID-19.
The key question is just what kind of growth rate can investors expect in the future, and does the company's valuation justify its long-term growth trajectory?
The case for Danaher stock
As noted, while there's a pandemic/endemic, there's a case for buying Danaher as portfolio protection. The idea is that if governments close down the economy again in response to an outbreak, investors should look to the very few collections of stocks that can do well in such an environment.
As you can see in the chart, Danaher was one of those stocks. So if your portfolio is overloaded with cyclical companies that will do well as the economy reopens, buying Danaher might provide some balance.
While that argument still holds water, the question is, what kind of growth rate can investors expect from Danaher when the pandemic turns endemic?
Danaher's growth rate
To help investors make up their minds, Danaher's management breaks out its growth in terms of core sales and base business core sales growth. Core sales growth is like-for-like sales growth that excludes the impact of acquisitions. Meanwhile, base business core sales growth includes revenue from COVID-related vaccines and therapies but excludes revenues related to COVID-19 testing.
The logic behind this is management's belief that as the pandemic becomes endemic, the demand for vaccines and therapies will continue. Still, the need for diagnostic testing will be much more volatile and will decline over time.
Indeed, management's guidance for 2022 is as follows:
- Full-year core sales growth in the mid-single digits.
- Full-year COVID-19-related testing sales growth in the low-single digits.
- Full-year base business core sales growth in the high-single digits.
As you can see, the lower growth rate of COVID-19-related sales growth in 2022 is slowing the growth rate of Danaher in 2022, but the underlying (base business core sales) growth is stronger -- a good sign for the long term.
What it all means for investors
The difference between core and base business core may appear to be small, but it has very significant implications for the company's valuation. For example, suppose you believe that the (base business core) high-single-digit growth rate can be used to pencil in Danaher's long-term growth rate. In that case, you will have a significantly different valuation for the company than you would if you use a mid-single-digit long-term growth rate.
For example, with a 5% annual growth rate, Danaher's earnings would grow by 62% over the next decade, compared to 116% with an 8% yearly growth rate. Long-term assumptions matter.
That's why analysts spent so much time on the last earnings call asking management about its underlying assumptions for growth in its life sciences segment. While it's uncertain just what the diagnostics rate will be, it's helpful to build base-case scenarios around what the life sciences growth rate will be over the long term.
What management said
CEO Rainer Blair has an answer to this question. During the recent earnings call, Blair reiterated his view that the key bioprocessing business would generate high-single-digit to low-double-digit growth in 2022, which "supports our high single-digit perspective beyond that."
Blair's confidence rests in the activity levels in "the project pipeline for monoclonal antibodies," which is "50% larger today than it was five years ago. For cell and gene therapy, it's 10x larger, driving extraordinary activity here in the clinical trials area." Monoclonal antibodies are engineered molecules produced in a laboratory to mimic or enhance the body's natural antibody system. They are manufactured using bioprocessing technology, in which Danaher is a leader.
It's a compelling case and speaks to the underlying growth rate in Danaher's business.
A stock to buy?
Over the long term, the case for Danaher remains attractive. Still, investors will have to expect some near-term volatility as the debate over its long-term growth rate will be impacted by the noise around COVID-19-related diagnostic testing. Trading at 28 times current earnings, the valuation looks slightly stretched.
That said, if the stock price keeps falling, at some point, Danaher will become an attractive stock, and long-term investors need to keep it on their radar screen.