We came across a bullish thesis on Danaher Corp (DHR) on ValueInvestorsClub by valueinvestor03. In this article, we will summarize the bulls’ thesis on DHR. DHR’s stock was trading at $250 when this thesis was published, vs. a closing price of $230.84 on November 19.
DHR is a diversified life sciences company with immense growth and evolution, especially during the COVID-19 outbreak. Its business segments are Biotechnology, Diagnostics, and Life Sciences, which offer critical enablers and focus on recurring revenue streams, high-margin consumables, and attractive growth opportunities.
The company’s diagnostics segment has remained resistant, spearheaded by non-respiratory molecular testing from Cepheid. While its total revenue declined by 11% year-over-year (YOY) in 2023, about 80% of its revenues are recurring, attached to the sales of consumables and service agreements. Also, the number of Cepheid testing machines tripled since 2019, as the company expects high-single-digit (HSD) growth in Diagnostics.
A healthcare professional in a lab coat holding a microscope and looking at a slide under the lens.
Despite biotechnology, the company’s highest-margin business, falling 10% in 2023 due to lower revenues and inventory adjustments, DHR predicts that it will stabilize by mid-2024 and achieve long-term mid-teens growth from biologics. Likewise, Life Sciences, which grew at an organic rate of 5.5% pre-COVID, contracted to 1% in 2023 but is expected to bounce at HSD with genomics and innovative tools.
DHR’s operating margins further highlight its resilience. They have been on the rise, increasing from 15.4% in 2015 to 25.1% in 2023. The company also has investment-grade credit with net leverage of 1.4x and $5.8 billion of free cash flow in 2023 to enable further acquisitions and future growth.
Additionally, DHR’s EV/EBITDA ratio is over 25 times, which initially one would not consider a cheap stock. But it represents higher margins, subscription-based revenues, and higher growth than before the pandemic. The company has a 3% free cash flow yield and organic revenue growth at HSD for the long term, making it possible to compound at double digits for years.
Lastly, each investment involves some degree of risk. Among the threats that DHR has mentioned are high competition, costs of acquisition, and technological risk. Nonetheless, adequate M&A management and solid R&D help DHR remain competitive. Besides, the company’s founders, Mitch and Steven, still own a 10% stake in the company, which is worth nearly $19 billion. Investing alongside the owners offers further confidence in considering DHR.
While we acknowledge the potential of DHR as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than DHR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: Stavros Tousios has no positions in the aforementioned stocks.