Danaher Corporation Fundamental Analysis
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Danaher Corporation
Last Updated: 4 Jul 2024
NYSE: DHR
GICS Sector: Healthcare
Sub-Industry: Diagnostics & Research
Table of Contents
You can download a summary of Danaher Corporation's fundamental analysis in PDF here.
Management
CEO: Rainer Blair
Tenure: 3.8 years
Rainer M. Blair has been the President, CEO, and Director at Danaher Corporation since September 1, 2020, and Director at Nestlé S.A. since April 20, 2023. He joined Danaher in 2010 and took on various leadership roles, including Executive Vice President from 2017 to 2020. Before that, he was CEO and President of Pall Corporation.
Under Blair's leadership, Danaher successfully spun off Veralto in Sep 2023, refocusing as a Life Sciences and Diagnostics Innovator. He enhanced the company’s portfolio through strategic acquisitions like Abcam, aiming for faster growth, higher margins, and stronger free cash flow.
In Q2 2023, Danaher demonstrated resilience with high single-digit base business core revenue growth in Life Sciences and Diagnostics. Blair's team navigated challenging conditions by committing to the Danaher Business System, mitigating supply chain issues, and improving productivity and manufacturing throughput.
Blair holds a BA from the University of Massachusetts and an MS from Boston University.
Let us now analyze the CEO’s compensation.
Danaher Corporation CEO Compensation Analysis. Source: Simply Wall St
The total compensation refers to the sum of all forms of payments and benefits received by the CEO per year. This can include salary, bonus, stock options, and other perks.
The graph above shows that the CEO’s compensation has been consistent with the company's performance over the past year, which can generally be a positive indication.
When a CEO's pay reflects the company's success, it suggests their interests are aligned with shareholders. If the company thrives, the CEO benefits too. This incentivizes the CEO to make decisions that boost the company's long-term value.
Looking broadly at Danaher Corporation’s management team, it has an average tenure of 6.6 years. It is considered experienced.
Business Overview
Danaher Corporation designs, manufactures, and markets professional, medical, industrial, and commercial products and services worldwide. It comprises over 15 operating companies organized under three segments: Biotechnology, Life Sciences, and Diagnostics.
Biotechnology
Danaher established the Biotechnology segment in 2022, which includes the Pall life sciences business acquired in 2015 and Cytiva acquired in 2020.
This segment focuses on bioprocessing, discovery, and medical applications. Danaher offers equipment, consumables, and services that help customers develop and manufacture biological medicines, including vaccines, protein-based drugs, and gene therapies.
Pharmaceutical companies and research institutions leverage Danaher's bioprocessing solutions to efficiently produce these medications, ensuring consistent quality and increasing patient accessibility worldwide.
Danaher's discovery and medical products also support research by enabling tasks like sample analysis and sterility testing. These solutions benefit scientists and medical professionals in hospitals and clinics by speeding up research, improving diagnostic accuracy, and ensuring patient safety.
Life Sciences
Danaher established the life sciences business in 2005 and has expanded through acquisitions, including Leica Microsystems, AB Sciex, Molecular Devices, Beckman Coulter, Pall, Phenomenex, IDT, Aldevron, and Abcam.
Danaher Corporation’s Life Sciences Businesses. Source: Danaher Corporation website
The Life Sciences segment caters to research and industrial needs. Danaher provides flow cytometry and lab automation tools that universities, pharmaceutical companies, and research institutions use to analyze biological information at the genetic, protein, and cellular levels. These tools aid in everything from basic research to developing new drugs and diagnostics.
Danaher offers mass spectrometry equipment for advanced molecular analysis, drug discovery, quality control, and environmental testing. Scientists in various fields rely on this technology for detailed analysis of complex mixtures.
Danaher also offers high-resolution microscopes used in laboratories, surgical suites, and pathology settings by researchers and medical professionals to visualize and analyze tiny structures.
Danaher supplies protein consumables like antibodies and assays in life sciences. These tools are crucial for studying biological pathways and are commonly used by pharmaceutical companies, research institutes, and universities.
Beyond life sciences, Danaher provides filtration technologies for industries like microelectronics, food and beverage, and power generation. These filtration systems remove contaminants from liquids and gases, improving manufacturing efficiency and equipment lifespan. Danaher's filtration solutions also ensure product quality and safety in the food and beverage industry.
Lastly, Danaher's genomic medicine businesses manufacture custom DNA and RNA for research and therapeutic applications used in gene editing, gene sequencing, and RNA interference. Researchers, pharmaceutical companies, and biotechnology institutions utilize these tools for various purposes, from drug discovery to developing gene therapies.
Diagnostics
Danaher expanded its diagnostics business through several acquisitions, including Beckman Coulter in 2011, Iris International and Aperio Technologies in 2012, HemoCue in 2013, Devicor Medical Products in 2014, the clinical microbiology business of Siemens Healthcare Diagnostics in 2015, and Cepheid in 2016.
The Diagnostics segment offers instruments, consumables, software, and services used in hospitals, clinics, and laboratories to diagnose diseases and make treatment decisions. Danaher provides a variety of equipment and tests for core lab-clinical applications.
These include chemistry systems for analyzing blood and body fluids, immunoassay systems for specialized diagnoses, hematology products for blood cell analysis, and microbiology systems for detecting infections. Automation is also included to streamline the testing process and reduce errors. Hospitals, clinics, and research labs rely on these tools for accurate diagnoses.
Danaher's molecular diagnostics business offers DNA-based testing for diseases and infections. Their user-friendly systems allow testing in various settings with minimal training. Additionally, Danaher provides instruments for measuring vital signs in critical care settings, used in hospital labs, intensive care units, and emergency rooms.
Lastly, Danaher's pathology diagnostics business offers equipment and supplies for pathology labs, used by pathologists, lab managers, and researchers to analyze tissue samples.
Danaher Corporation Reportable Segment Revenue For the fiscal year ended 31 Dec 2023. Source: Gurufocus
In 2023, sales by geographic destination as a percentage of total sales were: North America 42% (including 40% in the United States), Western Europe 23%, other developed markets 5%, and high-growth markets 30%. North America is defined as the United States and Canada, and high-growth markets include Eastern Europe, the Middle East, Africa, Latin America (including Mexico), and Asia (excluding Japan, Australia, and New Zealand).
Trends, Competition, and Strategy Overview
Danaher Corporation unites its businesses under the Danaher Business System (DBS), which emphasizes continuous improvement. These businesses typically sell recurring products and services directly to a wide range of customers worldwide.
Danaher focuses on creating long-term shareholder value through three key priorities:
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Strengthening its edge: They achieve this by consistently using DBS tools and fostering a culture that embraces them.
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Building a stronger portfolio: Danaher strategically invests in science and technology markets to acquire businesses that complement their existing ones or enter new markets.
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Top talent: They actively attract and retain highly skilled people.
Danaher measures its long-term progress against strategic priorities using financial metrics such as revenue growth, profitability, cash flow, capital returns, and certain non-financial metrics such as attracting and retaining talent.
To meet these objectives, Danaher acquires businesses and makes investments that complement or expand its portfolio into new and promising markets. Given the rapid technological development and specialized expertise in its markets, acquisitions, strategic alliances, and investments grant the company access to new technologies and domain expertise. Danaher identifies and integrates acquisitions and investments to drive growth and improve operating results, continually assessing the strategic fit of its existing businesses and potentially divesting those that no longer align with its goals.
Danaher Corporation Core Values. Source: Danaher Corporation 10K
The DBS goes beyond just processes and tools. It's a culture driven by five core values:
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The Best Team Wins
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Customers Talk, We Listen
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Kaizen is our Way of Life
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Innovation Defines our Future
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We Compete for Shareholders
Danaher's founders envisioned a company that benefits customers, employees, and shareholders in the long run. Through acquisitions and divestitures, they've transformed from their early days into the science and technology leader they are today. While the businesses under Danaher have changed, the DBS remains the company's guiding philosophy.
Danaher faces competition across its diverse markets. Competitors range from established regional players to highly specialized companies. Large corporations with strong financial backing also pose a threat. This competition intensifies due to new entrants, lower-cost manufacturers, emerging technologies, and industry consolidation.
While Danaher believes it leads in many markets, competition hinges on various factors. These include price, quality, performance, and factors like service, technology, distribution networks, and brand recognition.
Danaher Corporation Economic Moat
There are many ways to identify Danaher Corporation’s economic moat, but I focus on these 5 sources. The rating is purely subjective and is based on my in-depth understanding of the company.
Danaher Corporation Economic Moat
Economic Moat: Narrow
Danaher Corporation stands out from other diversified industrial companies. While it has various business segments, its true differentiator is its economic moat, a concept that refers to its sustainable competitive advantage.
Imagine a toolbox full of unique gadgets. These aren't your average screwdrivers and wrenches – they're high-tech marvels protected by patents and trademarks. These are Danaher's crown jewels, giving them a leg up on copycats. Patents ensure that competitors can't replicate the exact technology, and trademarks make Danaher's brands instantly recognizable as the go-to for these scientific marvels.
But the advantage doesn't stop there. Once a customer starts using Danaher's equipment, switching becomes a hassle. These tools are often essential for a client's operations, and switching could disrupt crucial workflows and potentially mess up results. This creates a captive customer base, especially for the recurring revenue streams that make up nearly 80% of Danaher's business.
It's a bit like a razor-and-blade model, where the high-tech "razor" (the initial equipment) leads to consistent sales of the "blades" (replacement parts and ongoing service).
The strength of this edge varies depending on the specific product. For example, Danaher's biotechnology segment, particularly the tools used in drug development and manufacturing, is particularly sticky.
These tools are crucial for biopharmaceutical companies, from discovering new molecules to producing medicines. Once a company starts using Danaher's equipment, switching becomes a regulatory nightmare, especially during the crucial clinical trial stage. If the drug is successful, that revenue stream keeps flowing for years, potentially even decades, for complex drugs.
Diagnostics is another area where Danaher excels. Their diagnostic tools, used in hospitals and labs, are like the trusted technicians behind the scenes, quietly keeping the operation running smoothly. These tools become ingrained in the lab's workflow, and labs are understandably hesitant to disrupt that smooth flow by switching to a competitor's system, especially when doctors are comfortable with the existing platform.
Even for routine tests, Danaher's tools offer advantages like automation and a wide range of test options, making them user-friendly favorites. Plus, diagnostics boasts the highest percentage of recurring revenue for Danaher, further solidifying its dominant position.
Danaher Corporation Performance
My quick performance checklist:
Has Danaher Corporation's revenue consistently grown year over year for the past 5 years? It increased until the fiscal year 2023, when the company saw a 10.3% decline.
Is the net income consistently increasing year over year for the past 5 years? It increased until the fiscal year 2023, when the company saw a 33.9% decline.
Has the cash flow from operating activities shown consistent year-over-year growth for the past 5 years? It increased until the fiscal year 2023, when the company saw a 15.9% decline.
Has the free cash flow remained positive for the past 5 years? Yes.
Is the gross margin % consistent or growing over the past 5 years? It has been trending upward over the past five years.
Has the EPS shown growth over the past 5 years? It trended upward until the fiscal year 2023 when the company saw a decline due to weak earnings.
Danaher Corporation's sales took a hit in 2023. Overall revenue dropped 10.5% compared to 2022, with core sales (sales from existing businesses) also falling 10.0%. This decline stemmed primarily from a decrease in demand for COVID-19-related products, especially in North America and Western Europe.
Other product and service categories also saw minor slowdowns. Currency fluctuations shaved off another 1.0% from reported sales, while acquisitions added a small 0.5% bump.
Developed markets, which make up a larger portion of Danaher's business, saw sales drop 12% year-over-year. This was driven by a low-double-digit decline in core sales, mainly due to reduced demand for COVID-19 diagnostics and a slowdown in the Biotechnology sector.
High-growth markets, representing 30% of total sales, fared slightly better with a 7% decrease. Here too, core sales dipped at a mid-single digit rate, primarily in China where the Biotechnology segment faced a tougher funding environment and lower activity levels.
Danaher Corporation Revenue, Net Income, Operating Cash Flow, and FCF (USD Million)
Has free cash flow per share increased over the last 5 years? Danaher Corporation's free cash flow per share has been inconsistent for the past 5 years.
Danaher Corporation FCF per Share
Management Effectiveness
Has Danaher Corporation's ROE stayed within or above the 12%-15% range year over year for the past 5 years? It has been below 10% except for fiscal years 2021 and 2022, when the ROE were above 15%.
Danaher Corporation's Return on Equity
A company having a ROE lower than the industry average is generally not a good sign for investors.
ROE is a measure of a company's profitability relative to its shareholders' equity. A lower ROE compared to its peers may indicate that the company is struggling to generate profits efficiently. This could be due to factors such as lower profit margins, higher operating expenses, or underutilization of assets.
Has the ROIC stayed within or above the 12%-15% range year over year for the past 5 years? No, it has been below 10% for the past five years.
Danaher Corporation Return on Invested Capital vs Weighted Average Cost of Capital
When a company’s ROIC is lower than the WACC, it means the company is not generating enough profit from its investments to cover the cost of that capital. It is essentially losing money on its investments. This is a sign of inefficiency and could indicate the company is destroying shareholder value.
The trendline for the number of outstanding shares is increasing, which would not please an investor.
Danaher Corporation Shares Outstanding (Million Shares)
Danaher generally does not buy back shares to keep its financial flexibility while pursuing its acquisition strategy. The company does pay a small dividend, which is a reasonable approach to distributing profits to shareholders, given the company's acquisition strategy.
Danaher Corporation Financial Health
Danaher Corporation Financial Health (USD Million)
Current Ratio: 1.9 (pass my requirement of >1.0, but <3.0)
I use the current ratio instead of the quick ratio to analyze the company’s liquidity. This is because I want a general overview of financial health, and the company’s inventory is a significant asset that can easily be converted to cash.
The trend of its current ratio has been relatively flat over the past five years, which is generally a good sign.
When compared to its industry, Danaher Corporation's current ratio is worse, as it is below the industry median of 2.0.
Debt-to-EBITDA: 2.6 (pass my requirement of <3.0)
Interest Coverage: 17.0 (pass my requirement of >3.0)
Debt Servicing Ratio: 4.0% (pass my requirement of <30.0%)
Danaher Corporation Intrinsic Valuation
Estimated intrinsic value: USD $135.87
Value is calculated using the discounted cash flow method (considering their cash and debt) and scenario planning.
Average free cash flow used: USD $6,200M
Projected growth rate: 7%
Beta: 0.9
Discount rate: 7.5%
Ideal margin of safety: 40% (Uncertainty: High)
Price range after the margin of safety: <USD $82.00
Date of calculation: 4 Jul 2024
Danaher Corporation Valuation
I use the past 5 years' free cash flow and apply a weighted average, giving more focus on the recent years. I then round the average to the nearest tens. In some instances, I use a more realistic number to represent the free cash flow.
The total debt and cash and short-term investments are the last quarter figures that are rounded to the nearest tens. In some instances, I use more realistic numbers to represent them.
Danaher Corporation Intrinsic Valuation
Danaher Corporation Relative Valuation
Danaher Corporation Price-Earnings Ratio vs its Peers
Danaher Corporation Historical Price-Earnings Ratio
Additional Resources
I recommend reading The Five Rules for Successful Stock Investing as it greatly helps in my stock analysis. If you want a complete collection of recommended books, please visit here.
My Concerns
Investing in Danaher comes with both economic and business risks. A weak global economy can hurt Danaher. Rising costs due to inflation and interest rates, along with slow growth, can make it harder to sell products. This could lead to lower demand, trouble collecting debts, and increased competition.
Global market uncertainty can disrupt supply chains, raise costs, and make future sales unpredictable. In extreme cases, economic problems could force Danaher's customers and suppliers out of business, impacting its finances and operations.
Danaher's future growth relies on its ability to acquire and invest strategically. However, this success isn't guaranteed.
Finding good deals and integrating new businesses can be difficult, especially with high valuations and competition driving up prices. Regulatory hurdles can further delay or block acquisitions. Even financing these deals can be a challenge if credit markets tighten. If Danaher can't maintain its historical acquisition pace, its growth could stall.
Danaher's strategy of acquiring businesses and making investments also carries risks. Acquisitions can underperform expectations, burden the company with debt, and create unexpected financial results.
Integrating new businesses can be difficult, leading to employee loss, competition, and missed cost savings. There is also the risk of inheriting unknown liabilities and regulatory issues from acquired companies.
Complex financial arrangements tied to acquisitions can be unpredictable and lead to disputes. Acquisitions can create significant intangible assets in books, which may need to be written down if they lose value. Disagreements with partners and the challenges of early-stage investments add to the risks.
Danaher Corporation does boast a competitive edge due to its narrow economic moat, but performance and capital allocation haven't been inspiring. Despite a healthy balance sheet considering their acquisitive nature, uncertainty surrounds the company's prospects.
If you're considering Danaher as an investment, account for this uncertainty. A significant margin of safety of at least 40% below the current stock price is recommended. This cushion will help absorb potential downside risk if the company's performance doesn't improve.
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