It's been a good year for investors in Danaher (NYSE: DHR), with the conglomerate's stock up nearly 23% in 2019 at the time of this writing. That gain is outpacing the S&P 500, and given the trends in recent earnings, it could continue. Let's look at the five reasons Danaher's stock is outperforming and what investors can expect in the future.
1. It has made growth-enhancing acquisitions
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For obvious reasons, Danaher's former CEO Larry Culp is attracting more media attention than current CEO Tom Joyce. Culp, now the CEO of General Electric (NYSE: GE), is engaged in turning around the ailing industrial giant. Meanwhile, Joyce continues to refocus Danaher toward life sciences and diagnostics with the aggressive deal to buy the biopharma business of GE Life Sciences for a net purchase price of $20 billion.
The deal makes sense for both parties. Danaher is buying growth, and GE gets cash with which to pay down debt. But given what Danaher's CFO Matthew McGrew disclosed on the recent earnings call, it looks even better. At the time of the deal announcement, Danaher's management claimed that the deal price represented 17 times expected 2019 EBITDA.
That looks like a rich but fair valuation for a growth business with 75% of its revenue recurring — implying a highly reliable income stream. But McGrew's recent disclosure that GE Biopharma is generating about $1 billion or so in free cash flow (FCF) will be music to the ears of Danaher's shareholders.
In a nutshell, Danaher is buying a growth business with highly reliable earnings for just 20 times FCF — a discount to the 24 times FCF multiple that Danaher traded on before the deal announcement. It's a very good deal for Danaher, but for GE investors it's a bit concerning that the company is divesting a business generating around a third of the FCF from its healthcare segment.
2. Its dental spin-off receives good news
Acquiring GE Biopharma isn't the only corporate action being taken by Danaher this year; the company plans to spin off its dental business in the second half of 2019. It's been underperforming in terms of revenue growth, but the latest news suggests signs of improvement — a timely development for shareholders, because they should want the dental business to start life as an independent company on a strong note.
As you can see below, the dental segment looks like it has returned to at least low-single-digit core revenue growth.
3. All segments are performing well
As you can see above, Danaher has reported mid-single-digit core revenue growth for six quarters in a row. Moreover, Joyce said, "Our growth was broad-based, with all four segments delivering better than expected results, and we continue to see healthy conditions across our major end markets."
Danaher's guidance assumes 4% core revenue growth in 2019. But with growth of 5.5% in the first quarter and management guiding toward 4% to 5% core revenue growth in the second quarter, that original 2019 guidance looks conservative. The subject came up on the earnings call, and Joyce promised investors an update in July — something to look out for.
4. Don’t worry about China
It's no secret that China's overall growth is slowing in 2019. Throw in the possibility of further friction from ongoing trade disputes, and the market has reason to be concerned by a possible impact on companies exporting to China.
That said, it's clearly a question of specific industry exposure. And fortunately, Danaher is well positioned for growth. As Joyce outlined, this was the ninth consecutive quarter of double-digit growth across all four segments in China. He went on to state that the only potential softness in growth he saw in the second half was due to coming up against very strong growth in the water quality business in the previous year. Life sciences, diagnostics, dental, and water quality are relatively better businesses to be exposed to, versus, say, automotive or consumer electronics in China in 2019.
5. Playing defense in 2019
With a market worried about slowing global growth and a reduction in U.S. industrial production growth, it's understandable if investors should want to avoid some of the more cyclical stocks in the market. In this context, Danaher's mix of defensive businesses — plus the addition of GE biopharma — mean the stock is likely to be favored by investors looking for relative security.
The GE biopharma deal and the dental spin-off are obviously the key corporate events of 2019, but investors shouldn't lose sight of the fact that Danaher appears to be tracking ahead of its expectations for the current year. With ongoing execution in the current vein, Danaher's stock can continue to do very well this year.
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