Danaher: Best Healthcare Company in Inflationary Environment (NYSEDHR)

Investment Thesis

Danaher Corporation (NYSE, DHR), designs, manufactures and distributes healthcare products. They have been a major player in the healthcare, life science and diagnostics industries for many decades. Their products are high-quality and technologically superior. Their ability to grow revenue (both organically and inorganically) has resulted in remarkable revenue growth. Profit margins have remained significantly higher than their competitors due to their superior products. Economic moat. Recent market volatility created an excellent opportunity to grab shares Danaher for a discount. I believe Danaher offers a great investment opportunity long-term investor because:

• Danaher had a record 4Q 2021. The quarter and through 2021 saw significant growth in revenue and profit.
• While many companies across industries are experiencing reduced profit margins because of inflation, labor shortages and supply chain disruptions; Danaher’s profit ratio actually improved.
• New products (SCIEX ZenoTOF 7600, Triple Quad 7500, etc.) They are performing well so I expect Danaher to continue its solid growth trajectory.

Outstanding 4Q 2021 result

Late January saw Danaher report 4Q 2021 results. This was another great quarter. Their 4Q revenue grew by 20% YoY, while overall revenue for 2021 grew by 32% YoY. Importantly, their core business grew the majority of their revenue growth, rather than temporary non-recurring revenue like e.g. Covid-related products). Core business revenue increased 25%, core operating margin rose by 560 basis points and the company generated over $7 billion of free cash flow.

This strong performance was also evident across all their segments. This was not an example of one segment leading the team. The revenue for the Life Sciences segment grew by 20.5% YoY, Diagnostics grew 29.5%, while Environmental & Applied Solutions grew by 4.0%. This portfolio is a great asset for long-term investors. It has leadership positions across multiple industries. Danaher’s growth is a result of many products and is reliable regardless of market conditions or economic environment. This business strength is illustrated by their 4Q 2021 and overall 2021 results.

Strong economic moat

A lot of companies from different industries have witnessed their profitability declines over the past year. Profit marginsDue to rising labor, material, and supply chain costs. A company that doesn’t have a strong competitive advantage and pricing power will be forced to absorb the rising costs. Danaher is proof that this is not true. Their strong economic moat has led to their profit margins increasing significantly in 2021.

Their operating margin and net margin were already well above the industry average (operating Margin: 2.14%, and net Income Margin -1.51%), but Danaher found ways to increase the gap. Their operating profit margin increased from 19% – 25.3%, while their net income margin rose from 16.3% – 21.8%. The fact that Danaher is able to maintain pricing power despite losing margins in other companies demonstrates Danaher’s superior technology, brand recognition and switching cost.

Continuating growth trajectory

Danaher has been a strong growth business for the past few decades (average revenue growth of 13% over the last five years), and this will continue for the next couple decades. During the last earnings call the CEO mentioned that their new products (SCIEX ZenoTOF7600 and Triple Quad7500, Leica Biosystems Aperio GT450 etc.) are now available. They are growing their market share and performing well. Danaher also spent $11 billion on acquisitions in 2021 and closed 14 transactions. The company also increased its R&D budget by 30% to improve products and boost organic growth.

I expect their growth trajectory to continue to be steady if you combine organic growth with all the inorganic through acquisitions. It’s easy to see their confidence and commitment to company growth, as they just spent $1.3 billion on capital expenditures in 2021. Because of their extraordinary cash generation, they have ample financial resources to support such growth. They also have an impressive R&D staff to provide the technological resources necessary to achieve this goal.

Intrinsic Value

To estimate Danaher’s intrinsic value, I used the DCF model. EBITDA ($10.336 M) was used as a cash flow proxy, and 7.0% WACC as the discount rate. I assumed EBITDA growth at 12% (5-year average revenues growth) for the base case and zero growth thereafter (zero terminal growth). I assumed EBITDA Growth of 14% & 16%, respectively for the bullish, very bullish, and the 5 years thereafter. Zero growth afterward. Given the recent acquisitions, capital expenditure on Danaher expansion, I believe 14-16% growth is possible.

The current stock price is currently at 15-25% upside according to the calculations. Danaher’s strong organic and through acquisition growth makes it easy to achieve this upside. Danaher shares are now available at a discount to their intrinsic value due to current volatility.

Below are the assumptions and data used to estimate the price target.

• WACC: 7.0%
• EBITDA Growth Rate: 12% (Base Case), 14% (Bullish Case), 16% (Very Bullish Case)
• Current EBITDA $10,336 Million
• Current Stock Price: $272.54 (03/06/2022).
• Rate of tax: 20%

Risques

Danaher’s current balance sheet is not strong due to heavy capital investment and acquisitions. Their cash position is $2.6 billion, compared to $23 B in total debt. Their liquidity measures (current ratio 1.43x and quick rate 0.89x respectively) are lower than their peers. Their strong cash generation ability and track record for profitability make me believe they are not in any financial danger. However, the investor should be aware of their debt levels going forward.

Although acquisitions of technology and new business can have a positive effect on a company’s growth trajectory, it comes at a cost. The company must be able to create synergistic benefits with increasing revenue and decreasing cost in order to justify the investment. They must also be able to successfully assimilate employees from other companies and their cultures. None of these tasks is easy to accomplish and can pose risks. Danaher has a track record of successfully incorporating businesses and has acquired many businesses. I expect them to continue that tradition.

Conclusion

Danaher is a great investment for long-term investors. For the past couple decades, shareholders have been very pleased with their strong growth, solid profitability, cash generating ability, and exceptional cash generation. Their solid 2021 results and recent acquisitions suggest that this will continue for the next few decades. The investor should monitor their balance sheet strength and the progress of the recent acquisitions. Based on their past track record, I expect 15-25% growth from here.