Stockchase Opinions

Stockchase Insights Danaher Corp. DHR-N BUY Dec 06, 2024

Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research

In recent years, DHR has been in the process of transforming itself from an industrial conglomerate into a pure life science and biotech player with a high degree of recurring revenues by divesting legacy industry assets. The company now possesses a solid profile of highly recurring revenue and strong margins, basically a “software-like” business model.

However, weak organic growth has caused the company’s shares to trade largely sideways in recent years. DHR also repurchased shares aggressively in the recent quarter, which the company did not implement for a long time, indicating that management believes shares are undervalued. That being said, DHR is trading at 28.4x Forward P/E with low single-digit revenue growth, which is certainly not that attractive. However, this is not the company’s issue but rather an industry-wide challenge, as similar headwinds also exist with other players like TMO.

Consensus estimates expect DHR to grow its topline by 7% on average over the next few years. We think now could be a good time to average into the position, but maybe not be too aggressively. We would be comfortable starting a position but only adding more when revenue returns to a solid growth trajectory.
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BUY

He bought this in early 2022, though it was mired in an inventory glut. He's stuck with it ebcause he expected it to bounce back. It still has a high PE though. Is down 19% from its August high, but is now a good entry point. An analyst just upgraded it. He expects the healthcare sector to come back next year.

WAIT

Likes it and they have performed well in the past, but as of late DHR has seriously underperformed. He's getting restless.

DON'T BUY

Expensive at 28x PE with tepid revenue growth. They're talking cost cutting, which is encouraging for profits, but it's making up for fundamental weakness.

DON'T BUY

The CEO is not doing an appropriate job. He wishes he didn't own this. Wants to see the board act.

TOP PICK

Diversified diagnostics and bio-processing franchise. Good capital allocators. On the upswing in terms of cyclicality. Under-deployed balance sheet can be utilized accretively. Until recently, valuation was coming down. Defensive healthcare, a more resilient vertical than industrials. More complex treatments of the future benefit a name like this (and TMO). Yield is 0.64%.

(Analysts’ price target is $245.38)
BUY

Since Covid hit, everything's slowed down. More pressure from the government. Long-term view is that its equipment will still need to be used to develop new drugs. Products needed by universities, governments, hospitals, biotech. Just have to wait for demand to pick up. Lots of opportunity for sales growth, just not at the same pace as before Covid. A buying opportunity.

DON'T BUY

Is horrified by it, a big disappointment. What is the CEO doing?

HOLD

He never sold it. Is sticking by it. Expects a comeback. Their China business isn't that bad.

TRADE

Not much of a dividend. Challenges with global revenues. Beat revenue by 3.5%, but bottom line fell 39%. Underperforming both the sector and the S&P 500. Healthcare sector is super-undervalued, and that could change.

Can trade successfully if you watch technicals closely. Rarely meets analysts' expectations. Don't get greedy; when it hits $220, keep an eye on changing momentum.

(Analysts’ price target is $245.00)
WEAK BUY

Loves it. Within tools diagnostics, they boast high growth among its peers. They make the equipment that produces biological drugs. Are exposed to the R&D space, which is seeing less funding due to Washington. The stock took a hit after the Waters-Becton deal, fearing more competition. 80% of revenue is recurring. Medium/long-term this remains a good business. There is a lot of policy noise on pharma, though, from Trump. This and this space needs to see some catalysts, perhaps in the fall, when we see hard numbers on the impact of Washington.