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With shares having become much more reasonably valued within the past month, investors might want to invest in Danaher (DHR) for sustainable long-term shareholder value creation given its promising long-term outlook.
DHR's share price has been caught in a broad market sell-off; it has dropped to ~$270 on January 27, 2022 (when this post is being composed) from the ~$330 level at the end of December 2021.
I was somewhat premature when I initiated a 50 share position @ $307/share on January 4, 2022 in one of the 'Core' accounts within the FFJ Portfolio; I disclose this purchase in my January 6 post. Following this initial purchase, however, I have acquired additional shares at lower prices and now hold 160 DHR shares.
On January 27, 2022, DHR released Q4 and FY2021 results that exceeded guidance. In addition, FY2022's core revenue growth is expected to be in the high single-digit percent range and a 35% - 40% operating profit is projected. This is an increase from a historical and pre-pandemic range of 30% - 35%.
I now take this opportunity to briefly revisit DHR.
Business Overview
An overview of DHR is provided in my January 6, 2022 post. I also strongly encourage investors to read Part 1 of its 2020 Annual Report / Form 10-K and to review the 2021 Investor and Analyst Day Presentation.
Financials
Q4 and FY2021 Results
Please refer to DHR's Earnings Release and Earnings Presentation which are accessible here.
Looking at the most recent Segment Information, we see that each segment is sizable and profitable in its own right. Based on DHR's acquisition and 'spin-off track record, I would not be the least surprised if DHR were to spin-off a segment in the future. Several publicly traded companies that were formerly part of DHR have gone on to reward shareholders.
Source: DHR - Form 8-K January 27, 2022
In FY2021, DHR delivered:
- 25% core revenue growth;
- 560 bps of core operating margin expansion;
- ~60% adjusted EPS growth; and
- over $7B of free cash flow (FCF).
It also deployed $11B of capital toward acquisitions and closed 14 deals across all four of its platforms. The largest acquisition, Aldevron, joined the Life Sciences segment in August 2021 and provides a beachhead in the important frontier of genomic medicine.
Throughout FY2021, DHR made significant organic investments to accelerate innovation across its businesses. R&D spend was up ~30% YoY and is now more than $1.7B annually.
FY2021 total CAPEX was $1.3B with substantial investments to expand production capacity across all businesses, particularly at Cepheid, Pall and Cytiva.
Source: DHR - Q4 2021 Earnings Presentation - January 27, 2022
Source: DHR - Q4 2021 Earnings Presentation - January 27, 2022
On the Q4 earnings call, management indicated that DHR is not immune to ongoing supply chain constraints and inflationary pressures. It is, however, proactively addressing these challenges by leveraging the Danaher Business System (DBS) and working closely with customers and suppliers to mitigate the impact. It is also using the DBS to accelerate price action and manage cost pressures.
Operating Cash Flow (OCF) and Free Cash Flow (FCF)
Since DHR actively acquires and divests assets, its diluted EPS is deceiving. 'Amortization of intangible assets' and 'amortization of acquisition-related inventory fair value step-up' are two large line items that consistently appear in the Consolidated Condensed Statements of Cash Flows.
In FY2021, DHR generated $7.077B in FCF versus $5.426B in FY2020 - a 30.5% increase.
FCF to net income conversion was 112% and marks the 30th consecutive year this figure has exceeded 100%.
Credit Ratings
DHR's credit ratings remain unchanged from those reflected in my January 6, 2002 post. The ratings and outlook are:
- Moody's: Baa1 with a stable outlook;
- S&P Global: BBB+ with a positive outlook.
Both ratings are the top tier of the lower-medium-grade investment-grade tier. These ratings define DHR as having the ADEQUATE capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to meet its financial commitments.
These ratings satisfy my conservative investment profile.
Dividend and Dividend Yield
DHR distributes a quarterly dividend; the 4th consecutive $0.21/share quarterly dividend is to be distributed on January 28, 2022 to shareholders of record on December 30, 2021.
The current $0.21/share quarterly dividend yields ~0.3% based on the current ~$270 share price.
While DHR's dividend yield is low, investors should not fixate on dividends and dividend yield. The focus should be on total potential long-term investment returns.
The vast majority of my investment returns since the late 1980s have come by way of capital appreciation; the returns from dividend income pale in comparison.
Historical performance does not dictate how an investment will perform going forward. DHR's strategy, however, is to retain a significant percentage of its earnings and free cash flow to grow the business; DHR has had considerable success with this strategy as evidenced by the average annual total return over a 10-year timeframe. I expect the same going forward.
Source: www.tickertech.com
Although DHR periodically repurchases shares, the diluted average common stock and common equivalent shares outstanding (in millions) in FY2012 - FY2020 is 713, 711, 716, 709, 700, 706, 710, 726, 719 and 737. The increase in FY2021 from FY2020 is attributed largely to shares issued to acquire Aldevron.
As noted earlier, DHR actively acquires and divests entities. The fluctuation in the outstanding number of shares is heavily dependent on this level of activity.
Valuation
DHR's FY2012 - FY2020 diluted PE levels are 17.31, 21.56, 22.44, 25.80, 19.66, 27.63, 26.51, 45.41, and 51.90. DHR, however, has undergone a radical transformation over the last few years after having divested slower-growing businesses and acquiring several faster-growing businesses. We can not, therefore, merely compare YoY PE levels.
When I initiated my DHR position, shares were trading at ~$307. The forward adjusted diluted PE levels based on EPS estimates from the 2 online brokerage platforms I use were:
- FY2021 - 20 brokers - mean of $9.83 and low/high of $9.40 - $10.01. Using the mean estimate, the forward adjusted diluted PE is ~31.
- FY2022 - 21 brokers - mean of $10.19 and low/high of $9.58 - $10.90. Using the mean estimate, the forward adjusted diluted PE is ~30.
- FY2023 - 15 brokers - mean of $10.65 and low/high of $9.45 - $11.31. Using the mean estimate, the forward adjusted diluted PE is ~29.
Only 4 brokers FY2024 estimates, and therefore, I did not rely on them.
Shares closed at ~$270 on January 27 and DHR has reported FY2021 diluted EPS of $8.50 giving us a diluted PE of ~31.8.
FCF to net income conversion was 112% and this was the 30th consecutive year in which this ratio exceeded 100% ($8.50 * 1.12 = ~$9.50 FCF/share).
Using the current ~$270 share price and $9.50 FCF/share, the P/FCF is ~28.4.
Currently, the forward adjusted diluted EPS estimates (revisions are likely over the coming days) are:
- FY2022 - 23 brokers - mean of $10.43 and low/high of $9.89 - $11.01. Using a ~$270 share price and the mean estimate, the forward adjusted diluted PE is ~26.
- FY2023 - 19 brokers - mean of $10.99 and low/high of $10.25 - $12. Using a ~$270 share price and the mean estimate, the forward adjusted diluted PE is ~24.6.
- FY2024 - 11 brokers - mean of $12.18 and low/high of $11.15 - $13.5. Using a ~$270 share price and the mean estimate, the forward adjusted diluted PE is ~22.
We know DHR's FCF/share consistently exceeds EPS so we would expect the forward valuation to be somewhat better when we use this metric.
DHR was richly valued when I initiated my position but shares are now a much better value.
Final Thoughts
I invest in DHR for sustainable long-term shareholder value creation.
After initiating a position in DHR, it has released FY2021 results that exceeded guidance and the share price has pulled back ~$37/share from the price at which I originally acquired shares. The long-term outlook remains positive and I consider the current valuation one at which investors might want to acquire shares for sustainable long-term shareholder value creation.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long DHR.
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your research and due diligence. Consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.
