Danaher Corporation: A Resilient Healthcare Stock with Growth Potential

Large Caps 3 replies 0 votes 128 views
Amy Swift 2 months

Let's talk about Danaher Corporation (NYSE: DHR), one of the stocks in the portfolio with a sub-1% dividend yield. This healthcare-focused company has caught the attention of many investors, including the person behind this post.

Danaher has faced its fair share of challenges, but the investor confidently added to their position during sell-offs this year. In April, there was an article titled "Danaher Sells Off - I'm Buying" after the stock dropped more than 6% following its earnings report.

Since April, Danaher's stock has managed to climb back up, rising by 14% as the latest earnings report signaled a potential breakout from the downtrend that began in 2021. The downward pressure was mainly due to rising interest rates and the fading impact of COVID-19 benefits. Fortunately, these headwinds are slowly waning, allowing investors to focus on the company's core business, which has been performing exceptionally well.

In the second quarter of 2023, Danaher reported solid performance despite the challenging operating environment. The company's revenue stood at $7.16 billion, just 7.6% below the previous year's results but slightly exceeding estimates by $40 million. Adjusted EPS was $2.05, beating estimates by $0.03, though experiencing a 25.7% YoY decline.

The company attributes its success in tough times to the Danaher Business System (DBS), which enabled them to navigate the challenging conditions effectively. DBS is not only a set of business processes and tools but also an integral part of the company's culture, with five core values driving its philosophy.

Danaher utilizes DBS to gain a competitive edge in its industry. It aims for strong core revenue growth and higher margins, fueling free cash flow, which is not only used for dividends but also for acquisitions that integrate into the DBS system, further accelerating revenue and free cash flow growth.

A prime example of Danaher's successful acquisition strategy was its purchase of Pall in 2015, where DBS principles led to 50% more new product launches, higher customer satisfaction, and significant cost savings.

Speaking of acquisitions, Danaher recently completed the combination of Cytiva and Pall Life Sciences, creating a premier global bioprocessing franchise. This move positions the company to benefit from an increasing number of biologic and genomic medicines in development and significant regulatory approvals for groundbreaking therapies.

In the second quarter of 2023, Danaher's sales reached $7.2 billion, with core revenue declining by 7%. The company's core business experienced 2% growth, but this was offset by a significant 9% decline due to the fading demand for COVID-19-related products and services. However, excluding COVID, growth would have been 2.0%, indicating a healthy core business.

Though some segments experienced declines, the Life Sciences segment saw a 5.5% increase in revenue, driven by strong demand in various markets. Despite challenges, Danaher managed to generate $1.6 billion in free cash flow during the quarter, highlighting its ability to generate high-quality earnings.

Looking ahead, Danaher expects challenges in the near term, with core revenue in the base business projected to decline by low single digits YoY in the third quarter. Total core revenue is expected to decline in the low to mid-teens percent range due to lower demand for COVID-19 testing, vaccines, and therapeutics.

The current consensus price target for Danaher is $274, and with the potential for double-digit annual free cash flow growth once COVID headwinds subside, the stock remains attractive for long-term investors. While the current valuation may not be deeply undervalued, any significant sell-offs exceeding 10% would present an opportunity for the investor to consider adding more exposure to the stock.

Danaher Corporation has demonstrated resilience in a challenging operating environment, with the Danaher Business System playing a key role in navigating through headwinds. With the upcoming spin-off of the Environmental & Applied Solutions segment as Veralto and the potential for new biotech tailwinds, analysts are optimistic about the company's future. Despite the current valuation, the potential for double-digit annual free cash flow growth makes Danaher an attractive prospect for long-term investors.

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