We care much more about where a stock is going than where it has been. With the Veralto (VLTO) spinoff complete, we decided to look at the path forward for Danaher (DHR), now free of its lower-margin, slower-growing water business. In the separation, we decided to retain the 173 shares of Veralto that we received due to our ownership of 520 shares of Danaher. We hope that each of us can grow faster independently than together. As Club members know, we have always considered Danaher to be one of the best-managed companies in the world. However, we are certainly not pleased with its year-to-date decline of nearly 8% compared to the 10% gain in the S&P 500. DHR YTD mountain Danaher YTD Looking ahead, we expect underlying fundamentals to improve of the most agile Danaher. Therefore, we cannot allow our current frustrations to get the best of us. Rather, we should consider the future setup and current valuation at these depressed levels. When we do that, we see a very favorable outlook for next year and three reasons to be optimistic. 1. To begin, let’s consider the portfolio revamp underway at Washington, DC-based Danaher. Management is currently working to finalize the acquisition of UK-based life sciences company Abcam (ABCM). That deal, along with the Veralto spinoff, are two moves that could accelerate earnings growth. The separation of Veralto is already expected to help Danaher’s core growth profile. Veralto management targets long-term core growth in the mid-single-digit range in percentage terms, while Danaher management sees ex-Veralto growth at a high-single-digit rate over the long term. Eliminating a slower-growing business is similar to eliminating an anchor to growth. So, as things stand, we are already looking at a business that will see its overall growth accelerate. Then, taking into account the acquisition’s single-digit growth rate of Abcam, we’re looking at a faster-growing Danaher in 2024 than we saw in 2023. Danaher management believes they can close the deal with Abcam in the middle of next year. . 2. It’s not just a reorganization of Danaher’s operating businesses that can boost fundamentals. We should also see an improvement next year in the bioprocessing end market, which would be a boon to the part of Danaher’s business that sells tools and services used in drug development and manufacturing. Stock reduction has been a big hurdle for Danaher and others in 2023, as larger customers (responsible for about 70% of the company’s bioprocessing sales) have had to deal with excess inventory as the world normalizes after Covid. In a Tuesday note to clients, Deutsche Bank said that “recent data from field verifications with industry participants supports a recovery of the bioprocessing end market in 2024, the most notable being a top 10 biopharmaceuticals.” [which was not named] indicating that it is no longer reducing inventory.” The analysts said that while they are not seeing a rebound yet, their checks on the industry are consistent with their previous view that the market will bottom out in December before returning to the growth. by mid-2024. That means about 70% of Danaher’s bioprocessing business could see a rebound in demand in the coming quarters. Investors could choose to wait until the rebound is confirmed, but the market is looking ahead. the future, so more often Otherwise, if you wait for confirmation, you will have missed much of the expected bullish move in the stock 3. The bioprocessing industry, which includes emerging biotech companies and others working on projects early-stage, has also taken a major funding hit following Silicon Valley Bank’s bankruptcy in March, combined with a two-year drought in the initial public offering (IPO) market, much-needed liquidity for many of these potential Danaher customers has sold out. As a result, they are seeing pressure on their operating and capital spending budgets, both of which drive Danaher’s sales, which have also taken a hit. However, with recent signs of life in the IPO market, we think the worst could be behind us as we head into 2024. The only caveat here, and it’s an important one, is interest rates. While the path of inflation will determine the ultimate trajectory of borrowing costs, the level of rates we are currently seeing may make it difficult for companies to go public and could limit the ability of smaller companies to obtain sufficient financing. As we head into the new year, we’ll be looking for more signs that a real IPO rally is underway. Armed with those three reasons to be optimistic, the question then becomes valuation. Are these tailwinds already being assimilated? Or is there an opportunity here for those willing to bet on the Fed achieving a soft landing or avoiding a recession altogether? Over the past five years, Danaher has traded at an average of 24.7 times enterprise value to EBITDA (earnings before taxes, depreciation and amortization), with a high of 37.9 times and a low of 17.4 times . Excluding Veralto, initial estimates (we haven’t yet seen all analysts update estimates for Danaher ex-Veralto) put Danaher’s 2024 EBITDA at around $8.4 billion. Given an enterprise value of about $171 billion, the stock trades at around 20.4 times preliminary 2024 EBITDA estimates, well below the five-year average. However, if shares were to trade up to that five-year average of 24.7 times, we would be looking at a share price closer to $270. However, recognizing the risk that high rates pose to the IPO market and the broader economy, if we learn that the Fed has tightened too much, we will maintain our price target of $250 per share for the time being, which represents about 23 times our estimate of $8.4 billion. . Obviously, there are some rough estimates here and the 2024 EBITDA estimate will be refined in the coming weeks as more analysts update their models. However, we believe this example serves to demonstrate that there is a solid margin of safety built into the stock at current levels, especially given our view that the underlying fundamentals will improve as 2024 progresses. Simply put, given the setup that As we look toward 2024 (with end markets set to improve, IPO financing coming back online, and a portfolio shakeup underway that could once again accelerate organic growth), we’d say shares should trade at a premium to at the 5th average of the year, or at least in line with it. We certainly can’t blame anyone for being frustrated with this name. However, we think the bottom line, unemotional takeaway, is that now is the time to start being more optimistic about Danaher, not add to the pessimism gripping the broader market. It’s also worth noting that our portfolio will benefit from any growth in Veralto’s standalone stock. (Jim Cramer’s Charitable Trust is long DHR, VLTO. See here for a full list of stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable fund’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH OUR DISCLAIMER. NO FIDUCIARY OBLIGATION OR DUTY EXISTS OR IS CREATED BY VIRTUE OF THE RECEIPT OF ANY INFORMATION PROVIDED IN RELATION TO THE INVESTMENT CLUB. NO SPECIFIC RESULTS OR BENEFITS ARE GUARANTEED.
In this photo illustration, the Danaher Corporation logo is seen on the screen of a smartphone and PC.
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We care much more about where a stock is going than where it has been.
With the spin-off of Veralto (VLTO) complete, we decided to look at the way forward to Danaher (DHR), now free of its lower-margin, slower-growing water business.
