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After you receive this email, we will start a position in Danaher (DHR), buy 100 shares for about $312.60. Following the transaction, the Charity Foundation will own 100 shares of Danaher. The position will make up about 0.75% of the portfolio.
The healthcare sector is starting its first trading day of the year on a decline and has been one of the worst performing sectors despite a positive start to the broader market. Today’s weakness follows a period of fitness, as healthcare took a backseat during a tumultuous December on the back of the team’s defensive qualities. When investors worry about an economic downturn or supply chain uncertainties, they often turn to healthcare because the sector doesn’t need a fast-growing economy to expand earnings and fulfill its goals.
Last week, we profited in several healthcare names, cutting AbbVie (ABBV) (because it made a new 52 week high day after day) and some shares of Abbott Laboratories (ABT) during recent operations. But with the current health care industry in decline and our positive outlook on the sector still intact, we see today’s weakness as an opportunity to redeploy the money we raised from other healthcare names and bought shares in one of the highest quality names in the entire consortium. : Danaher.
Disrupt Danaher’s Business
Danaher operates through three main segments: Life Sciences, Diagnostics and Environmental & Applied Solutions. While Danaher can be thought of as a multi-disciplinary name, some common themes throughout Danaher’s portfolio are the focus on mission-critical and high-value applications, business Consumable income from a widely installed base (75% of Danaher’s portfolio is repeatable), and exposed to secular long-term growth trends.
By segment, Life Sciences is the largest segment and accounts for approximately 52% of the company’s total estimated 2021 revenue. Danaher’s Life Sciences Platform has had a very strong 2021, with core revenue growth expected to exceed 20% with operating margins above 25%. The global growth drivers behind strong trends in Life Sciences are a shift towards biology, an increased focus on genomics and vaccines, treatments and research. research in response to COVID-19.
Danaher’s Life Sciences business has been boosted over the past few years through a number of acquisitions, most notably Cytiva (acquired at a hefty price tag from General Electric) and the recently closed Aldevron deal. . Cytiva has given Danaher a leadership position in the rapidly growing bioremediation market, and Aldevron is a leading producer of high quality DNA plasmids, mRNAs and proteins with exposure to the genomics industry. is developing rapidly.
Next is Diagnostics, which is expected to account for about 32% of Danaher’s 2021 revenue. Danaher’s portfolio is firmly positioned across the entire diagnostic landscape, whether it’s molecular via Cepheid, “niche” areas from Leica and Radiometer, or a lab presence with Beckman Coulter. Cepheid is the area of business that we want to focus on. It may be best known for its COVID-19 tests (and they will ship 55 million tests by 2021 alone), but the longer-term story here is that COVID-19 has accelerated decentralization. Healthcare comes to facilities closer to how the patient cares because it’s faster and more accessible. This has created a growth catalyst for the molecular diagnostics industry as a whole, but Cepheid is best positioned to be the winner as it has the largest installed base and extensive menu. best of all molecular diagnostics.
Finally, Environment & Application Solutions is expected to account for about 16% of Danaher’s 2021 revenue. This segment is split between a category that focuses on Water Quality and another that specializes in Product Identity. Both are quality assets that are growing faster than their peers.
Why we like Danaher
In addition to its exposure to secular growing end markets, what makes Danaher such a quality name is management’s track record of performance. Management continuously delivers operational improvements through adoption Danaher Business System. This book was Danaher’s competitive edge and it has become a powerful source of business innovation. Across the portfolio, Danaher focuses on improving cost structure, reinvesting for growth and accelerating core margins & growth of its various businesses. It’s continuous improvement, but where it works best is with M&A, which is Danaher’s bread and butter. Danaher is good at acquiring businesses and then accelerating growth while improving margins. If you check out the slide deck from Danaher’s DBS 2018 overview at link here, you should see DBS in action.
Danaher’s long-term, recurring revenue streams, exposure to growing secular end-markets, M&A execution, and ongoing operational improvement of Danaher have created a long-term growth model. interesting. At Danaher’s September Analyst’s Day, management issued long-term guidance for single-digit core revenue growth (up from 5-6% before 2019), expansion of operating margin from 50 to 75 points Basic, strong free cash flow with conversions (FCF divided by net income) greater than 100% plus more conversions. Taking it all together, Danaher believes it will deliver double-digit earnings-per-share growth over the long term. Danaher’s continued improvements to its portfolio based on recurring revenue streams have made it a fairly high-earning company.
We are starting Danaher with a $360 price target, which represents about 35 times FactSet’s consensus estimate for 2022 earnings per share. The stock isn’t cheap, but Danaher consistently trades at a premium thanks to its high-quality business model, management’s M&A track record, and long history of continuous operational improvement through the Danaher Business System. Additionally, we think this premium will be justified if core revenue growth accelerates from pre-2019 levels as management expects. And current 2022 revenue estimates could be conservative as COVID-19 headwinds (from testing & vaccines & treatments) are proving to be more durable than previously thought.
As always, we never want to buy all at once when we place a new stock position for the Charity Foundation. We want to scale deeper over time, explaining why we started relatively small this morning with the starting position. But with stocks down around 5% today and down from their ~$333 highs, we believe this drop has made an attractive entry point.
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