Danaher (NYSE:DHR) is one of those stocks that many investors have only peripherally heard about, yet has been a staple in multi-billion dollar funds, such as Generation Investment Management, for years.
What is it about Danaher that smart money has figured out, but which many retail investors have failed to spot?
For one, retail investors gravitate to what’s grabbing headlines but Danaher offers something different, stability, innovation, and, more importantly, an abundance of free cash flows.
Danaher Has a Wide Economic Moat
Danaher is quite an unusual firm in that it incorporates over 400 portfolio companies that have come under its corporate umbrella from acquisitions.
Its signature Danaher Business System has facilitated cost-cutting and revenue growth for these firms in order to allow them maximize their market opportunities.
In a sense, Danaher is more like a venture capital firm than a regular organization with a wide variety of businesses under its hood that collectively produce a diverse revenue stream and mitigates against economic downturn risk.
The wide variety of firms also means Danaher has a wide economic moat because few companies can dare to emulate its strategy, which has clearly succeeded.
One example of that is its revenue growth, which has been steadily higher in each of the past 5 years. From $17.0 billion in top line sales in 2018 to $31.4 billion in 2022, Danaher has sustained impressive financials through thick and thin.
Perhaps even trumping the top line figures is the operating income line item that has grown from $3.0 billion to $8.4 billion in that same timeline.
All that positivity has fared well when it comes to Wall Street’s view of the stock.
How Do Analysts Rate Danaher?
Of the 22 analysts covering Danaher, price targets range from a low of $208 per share to a high of $306 per share.
The median forecast pegs fair value at $240 per share, above the calculation of a discounted cash flow forecast which results in a more pessimistic intrinsic value of $213 per share.
One highly attractive aspect of Danaher share price, especially for conservative investors, is its relatively low volatility. Combine that with a modest dividend yield of 0.56% and a 5 year growth streak, and you end up with a stock that is worthy of serious consideration.
So, is Danaher a buy? That depends on where it sits on the valuation curve.
Is Danaher Stock Undervalued?
Danaher is a $141 billion market capitalization firm trading at a P/E of 23.9x, a figure more lofty than we would like to see in order to declare it as a steal. So too, Danaher’s price-to-sales ratio of 4.7x doesn’t convey that it’s a bargain at present levels.
Nonetheless, Danaher is undervalued by 26.5% according to analysts estimates which place fair value at $240.09 per share.
The upside opportunity using a discounted cash flow forecast analysis is a bit more pessimistic at 13.0% to intrinsic value of $213.80 per share.
Where the company really shines brightly is that the earnings used to calculate these valuations are highly predictable and cash flows far exceed income levels.
Danaher Financials Are Impressive
One financial aspect of Danaher that we haven’t addressed yet is its balance sheet, which is in very good shape. Danaher has more than doubled its cash pile over the past 3 years from $6.0 billion to $12.2 billion in the most recent quarter.
Impressively, that cash increase has come without a commensurate spike in long-term debt levels, which in fact have fallen from $21.1 billion to $19.5 billion.
So too does the company continue to spin off enormous amounts of levered free cash flow with each passing quarter. Most recently, that key figure was $1.3 billion, though it’s generally ranged from $1.5 billion to $1.9 billion in each quarter over the past three years.
Is Danaher Stock a Buy, Sell or Hold?
The merits of owning Danaher largely stem from analysts’ ratings and the quality of its earnings. But there are reasons to be concerned at this time, not least an accelerating trend of declining revenues in recent quarters.
Looking back over the past three years, revenues growth year-over-year has fallen from 57.9% in Q1 2020 to -10.3% in Q3 of 2023.
The decline has been slow and steady with virtually each sequential quarter underperforming the last until finally in Q1 2023 the growth turned negative and continued to slide further into the red.
So, while Danaher shareholders enjoy a high return on book equity and, technically, the RSI is in oversold territory, the share price isn’t screaming buy at this time. If anything, Danaher is more of a hold than a buy.
Danaher is a stock for any conservative investor’s shortlist thanks to its wide economic moat, predictable and high levered free cash flow, fortress balance sheet and diversified revenue streams.
Where it falls short at this time is primarily on the top line due to a steady decline in revenues over the past three years with the negative trend accelerating in recent quarters.
It’s clear the market has factored in a lot of the bad news with DHR share price down 18.4% year-to-date.
Nonetheless, that plunge relative to the S&P 500’s 10% gain for the year has provided an opportunity for value investors keen to scoop up a quality stock that is technically oversold.
Analysts rate the stock considerably higher, and assess fair value to sit around 26% higher. So too does a discounted cash flow forecast validate the calculation that the stock should be higher, albeit just 13% from present levels.
For existing shareholders, selling now doesn’t seem to be an attractive proposition given how oversold the share price is but equally prospective investors may wish to sit on the sidelines until the top line turns back into the black before considering a position.
All in all, that makes Danaher a Hold at this time if a position has already been established and a wait-and-see if not.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.