Danaher: Better Positioned for the Future (NYSE:DHR)

It’s been five months since we published our first article about Danaher.New York Stock Exchange: DHR). A lot has happened since then, including the annual earnings release and the spin-off of Beralto. This article will aim to summarize It does all of this and updates the paper and outlines the new parts that make up Danaher.

annual performance

Danaher announced its full-year results for 2023 on January 30, rising 4.75% in the session. This has been a transitional year for the company, thanks to the spinoff of Veralto and the company caught up in a cycle of reduced spending by its end customers. So, excluding the impact of Veralto, fiscal year revenue was down 10%. EBIT was down 30% and adjusted EBIT margin was still down from 29% to 23%. 28%. Most of these adjustments are due to impairments, non-cash charges that do not impact the Company’s cash generation. FCF margin decreased by 21%, FCF margin decreased from 24% to 21%, and FCF/Net income conversion increased to 121%. All excluding Veralto influence.

Below I will include some comments from the conference call. In December, it completed the acquisition of Avcamp, which will benefit its life sciences segment. The 10% revenue decline includes a 9.5% impact from COVID-19-related sales declines, as expected. Although portfolio shifts and macro conditions will continue through the first half of the year, the company notes that it is better positioned to ride longer-term trends and achieve higher revenue growth over the long term. Demand in developing countries is less affected, and the situation in China remains somewhat difficult. In the long term, China will be a powerful growth engine as it seeks to build its own pharmaceutical industry. However, it is worth noting that comparisons in China (12% of Danaher sales) were difficult due to its unique grant program, which has accelerated the acquisition of many life science research tools, especially in the academic market.

In recent years, the company has improved through spinoffs of Veralto and Envista and acquisitions of Cytiva, Aldebron, and Abcam. Additionally, Cepheid is now six times larger than it was before the pandemic and will likely enjoy repeat demand every flu season thanks to its 4-in-1 test. They do not expect the annual order intake ratio to exceed 1, but expect it to improve slightly from the current range of 0.8 to 0.85. Danaher operates without cancellation invoices. This may be detrimental to the company in some cases, but it is better for customer satisfaction. We believe that continuing and maintaining long-term customer relationships is the right way to operate.

JP Morgan 42nd Annual Healthcare Conference 2024

On January 2nd, Danaher attended an exciting conference hosted by JP Morgan. During the event, they discussed the future of the company and shared valuable information. This will be briefly explained below.

Repeat demand is already at 80%, compared to 68% in 2018. Being a repeat business, they are in close contact with their end customers and keep them apprised of changing trends and new innovations. DBS systems have improved over 40 years. Long-term growth estimates rarely take into account potential drug launches for Alzheimer’s disease or GLP-1, so there is upside opportunity and long-term guidance may be conservative.

In addition, the spin-off of two businesses, Envista and Veralto, the acquisition of Cytiva, Aldevron, and Abcam, and the positive impact on Cepheid due to COVID-19, etc. An interesting image was presented of the changes that Danaher had experienced. . The 4-in-1 test has become a recurring revenue stream, estimated at $1.5 billion each flu season. With this improvement in its business and outlook, one might think Danaher deserves an upward re-rating from the average 23x FCF it has traded at over the past decade.

Next, I’d like to share some remarks from President and CEO Rainer Blair.

He described the steps taken in an acquisition:

“Here you can see that we always use the three dimensions of the market to develop an exclusive view of the end markets to find sustainable long-term, long-term growth drivers. Of course, we again look at the companies in those markets. , develops a proprietary view of defensibility, i.e. defense against competitive advantage or ability to create competitive advantage. And of course, we look at the financial model and the valuation of that. And when all three of these dimensions intersect—not one, not two, but all three—that’s when we unleash the power of executing trades and generating compounded returns over the long term.”

As mentioned in the first article, all the cash received during the pandemic was used to make good acquisitions.

“So again, we are positioning ourselves in Aldevron, which is a very attractive end market, the gold standard for delivering nucleic acids in a very attractive genomic medicine end market. And, as I just said, Abcam is a very attractive end market for proteomics research and analysis. It’s the gold standard, so once again we’ve improved our end market positioning while also improving the financial profile of the business.”

It also provides perspective on the long-term tailwinds for the business.

“If you just think about the size of the drug development pipeline, it continues to grow. Last year in the U.S. we had 34 approvals from the FDA, which is a very high number from a historical perspective, and we continue to see a tremendous amount of approvals coming in. The market penetration rate of biopharmaceuticals is relatively low at less than 10% worldwide, and for various reasons, patients who can use these biopharmaceuticals are unable to access them. From a diagnostic perspective, diagnosis ultimately provides value-based medicine. It’s a catalyst to drive forward and identify the right patient at the right time for the right treatment, and the right treatment means knowing that a particular patient will respond to the treatment, and ultimately the treatment is prescribed. So we’re not only here in the U.S., but we’re also in Europe and China. “We believe long-term growth drivers remain solid.”

Some numbers and conclusions

They expect the first half of 2024 to be weak with a negative impact on sales, and expect to bottom out the cycle and experience positive growth in the second half of the year, despite forecasting a low single-digit decline in overall sales for 2024. I think the stock was up almost 5% on closing day, but it’s likely the market will punish if the second half of 2024 doesn’t unfold as expected.

The image below shows FCF for Veralto and Danaher, excluding Veralto. The numbers in black are those provided by the company, as Danaher has provided quite a bit of information up to 2020. All blue numbers are my estimates from 2017 to 2019. What we can see is that Danaher’s FCF margin, excluding Beralto, increased from 18% to 25% due to the pandemic. This year it’s sitting at 21%, but considering that CAPEX will normalize to some degree because high volume production is no longer needed to meet demand (normalizing to 4% of sales) and order volumes will also normalize, and thus margins will be better than Danaher’s. Not affected by fixed costs. The company’s FCF margins translate to approximately 25%-28%, which translates to FCF growth of between 11% and 14%. I’m not sure to what extent management is considering the potential positive impact on sales from treatments for new diseases and the patent expirations mentioned in the first article.

However, if you want to remove any doubt, you can always build a 10-year discounted cash flow model and see what different FCF growth rates are and what fair value we can get. In this case, we used a discount rate of 10% and a long-term growth rate of 3.5%. Based on all of this, I rate Danaher a ‘Buy’.

To conclude, let’s look at the performance differences between Danaher stock and Beralto stock since the spin-off date. As is the case with other spin-offs, this performance gap is expected to persist over the long term as Danaher divests unprofitable, slow-growing, and capital-intensive businesses.

conclusion

Danaher has gone through a process of change during the year. No doubt, she said, all the events that have occurred have made it more difficult to analyze the company in the near term. The good news is that my confidence in the business model and management remains very high, as the long-term outlook remains intact and slightly improving.