We are making our first new buy of 2022
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Scott Mlyn | CNBC
This article was first sent to Jim Cramer’s CNBC Investing Club members. For the most up-to-date updates, subscribe to our email list subscribe here.)
We will initiate a position once you have received this email. Danaher (DHR)The Charitable trust purchased 100 shares for $312.60. The Charitable Trust will now own 100 shares in Danaher after the trade. It will hold approximately 0.75%.
The year’s first trading day is underway in the healthcare sector. It is the lowest performing sector despite the strong start to the market. The weakness today follows a period when healthcare had been in favour throughout December’s volatile trading. This was due to its defensive characteristics. Investors often look to healthcare when they are worried about an economic slowdown and supply chain uncertainty. The sector does not need to grow fast to increase earnings and achieve its objectives.
A couple of names in healthcare were profiteering last week. We also did trimming. AbbVie (ABBV) (as it made a new 52-week high day after day some shares of Abbott Laboratories (ABT) into its recent run. We still see the positive outlook on the sector and healthcare in decline today as an opportunity for us to redeploy our cash and buy shares of Danaher, one the best-quality names within the group.
Danaher’s businesses being taken down
Danaher operates through three main segments: Life Sciences, Diagnostics, and Environmental & Applied Solutions. Although Danaher is considered multi-industry, there are some common themes throughout Danaher’s entire portfolio. These include a focus upon high-value and mission-critical applications and consumable revenue streams from an extensive installed base (75 percent of Danaher’s portfolio is recurring), as well exposure to long-term secular trends.
Life Sciences makes up 52% of Life Sciences’ estimated 2021 total revenue. It is also the largest segment. Danaher’s Life Sciences platform saw a strong 2021 with core revenue growth exceeding 20% and operating margins well above 25%. Global growth drivers for the Life Sciences industry’s strong trends include the shift to biologics and increased emphasis on genome medicine.
Danaher’s Life Science business has been boosted by many acquisitions in the last few years. These included Cytiva, which was acquired at a very high price from General Electric, and the just closed Aldevron transaction. Cytiva provided Danaher with leadership in the rapidly growing market for bioprocessing, while Aldevron was a top producer of high-quality plasmid DNA and mRNA and other proteins that are exposed to the growing field of genomic medicine.
Danaher’s next revenue stream is in Diagnostics. It is estimated that Diagnostics will account for 32% of 2021 revenues. Danaher holds a strong portfolio in all areas of diagnostics, from molecular through Cepheid to “niche” areas such as Radiometer and Leica, up to a presence at Beckman Coulter. Cepheid will be our focus. While it may be most well-known for their COVID-19 test (and 55 million will be shipped in 2021), the long-term story is about how COVID-19 has helped accelerate the decentralization and centralized healthcare. Because COVID-19 is more efficient and accessible, the patients are able to access the care they need faster. Cepheid’s largest molecular diagnosing laboratory and extensive molecular menu has made it a strong growth engine.
Lastly is Environmental & Applied Solutions, which is expected to make up about 16% of Danaher’s 2021 revenues. Split into two portfolios, one focusing on Water Quality, and the other concentrating on Product Identification. Both quality assets are growing quicker than their industry counterparts.
We like Danaher
Danaher has been exposed to secular growth end markets. But what really makes Danaher so special is the management’s track record in execution. The application of the principles is a constant improvement in the management’s operational performance. Danaher Business System. It is Danaher’s key competitive advantage and a source of strong business improvement. Across the portfolio, Danaher is focused on improving the cost structure, reinvesting for growth, and accelerating margins & core growth of its different businesses. It’s continuous improvement, but where it happens best is with M&A, which is Danaher’s bread and butter. Danaher excels at buying businesses to accelerate growth, while improving margins. Take a look below at Danaher’s 2018 DBS overview slide deck. link hereYou will be able to see the DBS at work.
Danaher’s durable, recurring revenue streams, exposure to secular growing end markets, M&A execution and constant operational improvements have created an attractive long-term growth model. At Danaher’s September Analyst DayManagement provided long-term guidance that included mid-single-digit growth in core revenue (accelerating from 5-6% Pre-2019), 50-75 basis point operating margin expansion and strong free cash flow (FCF divided with net income) of greater than 100%. Danaher expects to achieve double-digit increases in earnings per share for the long term. This company has been a great earnings compounder because of Danaher’s constant operational improvements to a portfolio that is based on recurring revenues streams.
Danaher is being initiated by a Price target at $360. This is approximately 35x FactSet’s consensus 2022 earnings per shares estimate. The stock isn’t cheap, but Danaher consistently trades at a premium because of its high-quality business model, management’s M&A track record, and long history of continuous operational improvements through the Danaher Business System. If core revenue growth is higher than it was in 2019, as we expect, this premium should be justified. And current 2022 revenue estimate may be conservative because COVID-19 tailwinds (from testing and vaccine & therapeutics) are proving to be more durable than previously thought.
When we purchase stock for Charitable Trust, it is not a good idea to do so all at once. Because we prefer to grow over time, this is why our starter position today is relatively modest. We believe that this entry point is attractive, with shares falling about 5% and a nice drop from the $333 peak.
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You will be notified by Jim Cramer if you subscribe to CNBC Investing Club. Jim may then make a trade. Jim must wait for a trade signal to be sent before he buys or sells a stock within his portfolio of charitable trust stocks. Jim may wait 72 hours to execute a trade if he has discussed a stock with CNBC TV. See here for the investing disclaimer.
(Jim Cramer’s Charitable Trust was long DHR and ABBV.
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