Stock Analysis & Ideas

What Does Danaher’s Risk-Reward Profile Tell Investors?

Danaher Corporation (NYSE: DHR) is a well-known name in the medical diagnostics and research industry. The company specializes in designing and manufacturing commercial, professional, industrial, and medical products.

This $183.32-billion company conducts operations through its headquarters in Washington, DC.

It delivered better-than-expected results for every quarter in 2021 and kept its winning streak alive in the first quarter of 2022. Its earnings were $2.76 per share in the first quarter, 3.8% above the consensus estimate, and revenues at $7.7 billion surpassed the consensus estimate by 2.1%.

Presently, the analyst community is cautiously optimistic about Danaher and has a Moderate Buy consensus rating based on five Buys and two Holds. Danaher’s price forecast of $320.43 suggests 29% upside potential from current levels. Over the past year, shares of Danaher have decreased 2%.

Let us briefly discuss the company’s tailwinds and headwinds.

Healthy Life Sciences Businesses

The largest share of Danaher’s revenues comes from the Life Sciences segment. In the first quarter of 2022, the Life Sciences segment’s revenues were $3,882 million, up 9.5% year-over-year. It accounted for 50.5% of Danaher’s total revenues.

Through this segment, the company offers consumables and instruments used to find the reasons for disease, work on therapies, and develop vaccines and drugs. Prime bioprocessing businesses under this segment are Pall Biotech and Cytiva; IDT and SCIEX are two of the instruments businesses.

In the quarters ahead, healthy demand, a solid backlog, and more spending on research and production by customers are forecast to be advantageous for the Life Sciences bioprocessing business. Danaher is also investing in expanding its manufacturing capacity. Facilities in Beijing, Wales, and South Carolina have been recently opened to meet growing demand.

For the instruments business, healthy demand in major end markets and innovation investments are likely to benefit.

Growth Prospects

In the quarters ahead, Danaher seems well-positioned to benefit from its diversified product offerings and exposure in multiple end markets. Healthy demand and a zeal for innovation add to its strength.

Danaher anticipates core sales growth (year-over-year) of low-single digits for the second quarter of 2022 and in the mid-single digits for 2022. Base businesses (core sales including the impact of vaccines and therapeutics related to COVID-19 and excluding the impact of COVID- 19 testing) are expected to grow in mid-single-digits and high-single-digits for the second quarter and 2022, respectively.

The company’s President and CEO, Rainer M. Blair, said, “We just have an exceptional collection of businesses, all powered by the Danaher Business System that serve attractive end markets with durable secular growth drivers, and it’s this combination that differentiates Danaher today and provides a strong foundation for the future.”

Impressive Rewards to Shareholders

Over the years, Danaher has been rewarding its shareholders handsomely with dividend payments. In 2021, the company’s dividend payouts totaled $742 million, while the same was $191 million in the first quarter of 2022.

The company’s quarterly dividend rate is $0.25 per share and was paid to shareholders on April 29. Notably, Danaher had increased its quarterly dividend rate from $0.21 per share to $0.25 per share in February of this year.

It is worth mentioning here that the company’s solid cash position supports its shareholder-friendly policy. Exiting the first quarter, the company had cash and cash equivalents of $3.72 billion, and its cash flow from operations in the first quarter was $1.97 billion.

Near-Term Headwinds Causing Concerns

Danaher is exposed to risks arising from unfavorable movements in foreign currencies and geopolitical issues. In the first quarter of 2022, forex woes had an adverse impact of 2% on the company’s revenues.

Also, high costs of sales and operating expenses, which grew by 14.5% and 12.3%, respectively, in the first quarter, are concerning for the company.

Further, the shutdowns in China related to COVID-19 are predicted to adversely impact Danaher’s revenues by 2% to 3% in the second quarter. 

Analysts’ Take and Sentiment Indicators

A few days back, Deane Dray of RBC Capital maintained a Hold rating on DHR and the price target of $299 (20.3% upside potential).

Another analyst, Catherine Schulte of Robert W. Baird, reiterated a Buy rating on Danaher while lowering the price target to $319 (28.4% upside potential) from $334.

The analyst opined that solid demand and funding across the portfolio will be beneficial for Danaher in 2022. Also, the company is well equipped to manage the COVID-19 impacts in China, supply-chain and cost-inflation woes, and geopolitical issues.

On a positive note, financial bloggers’ sentiment is 93% Bullish on Danaher compared with the sector average of 71%. However, the confidence signal of insiders is presently Negative for DHR, while retail investors on TipRanks display Very Negative sentiment.

Also, the hedge fund confidence signal is Very Negative for DHR. Hedge fund holdings in DHR have decreased by 666.9k shares in the last quarter.

Conclusion

Danaher’s growth prospects are impressive and make it a worthy investment option for long-term investors and risk-takers. However, a wait-and-see approach to the stock will be appropriate, considering its near-term risk-reward profile.

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