We make our first new purchase of 2022
Jim Cramer on CNBC’s Halftime Report.
Scott Mlyn | CNBC
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After receiving this email, we will initiate a position in Danaher (DHR), buying 100 shares at around $ 312.60. Following the transaction, the charitable trust will own 100 shares of Danaher. The position will represent approximately 0.75% of the portfolio.
The healthcare sector enters the first trading day of the year down and is one of the worst performing sectors despite the positive start to the wider market. Today’s weakness follows a period of strength with health taking center stage throughout a volatile December thanks to the group’s defensive qualities. When investors worry about an economic slowdown or uncertainties in the supply chain, they often turn to healthcare because the sector does not need a fast growing economy to increase profits and achieve its goals.
We took profit in a few health care names last week, slashing AbbVie (ABBV) (as it hit a new high of 52 weeks day in and day out) and some shares of Abbott Laboratories (ABT) in its recent run. But with declining healthcare today and our positive outlook for the industry still intact, we see today’s weakness as an opportunity to redeploy the cash we have raised from our other names in healthcare and business. ‘buy stocks in one of the highest quality names in the entire group: Danaher.
Breaking down Danaher’s businesses
Danaher operates in three main segments: life sciences, diagnostics, and environmental and applied solutions. While Danaher can be seen as a multi-industry name, some of the themes common to Danaher’s entire portfolio focus on high-value, mission-critical applications, consumable revenue streams from a large installed base (75 % of Danaher’s portfolio is recurring), and exposure to secular long-term growth trends.
By segment, Life Sciences is the largest, accounting for approximately 52% of the company’s total estimated revenue in 2021. Danaher’s Life Sciences platform had a very strong 2021, with revenue growth of base which is expected to exceed 20% and operating margins above 25%. The global growth engines behind strong trends in the life sciences are the shift to biologics, increased attention to genomic medicine and vaccines, therapies and research in response to COVID-19.
Danaher’s Life Science business has been boosted in recent years through several acquisitions, including Cytiva (which was purchased cheaply from General Electric) and the recent deal with Aldevron. Cytiva has given Danaher leadership in the rapidly growing bioprocessing market, and Aldevron is a leading producer of high quality plasmid DNA, mRNA and proteins with exposure to the genomic medicine industry. in full growth.
Next is Diagnostics, which is expected to account for around 32% of Danaher’s revenue in 2021. Danaher’s portfolio holds a strong position across the diagnostics landscape, whether in molecular domains through Cepheid, “niche” areas. of Leica and Radiometer, or a lab presence with Beckman Coulter. Cepheid is the company we want to focus on. He’s perhaps best known for his COVID-19 tests (and they’ll ship 55 million tests in 2021 alone), but the longer-term story here is how COVID-19 has accelerated the decentralization of care. health services to settings closer to the patient at the point of care because it is faster and more accessible. This has created a growth catalyst for the molecular diagnostics industry as a whole, but Cepheid is in the best position to be the winner as it has the largest installed base and the most comprehensive menu in all molecular diagnostics.
Finally, Environmental & Applied Solutions, which is expected to represent around 16% of Danaher’s 2021 revenue. This segment is divided between a portfolio that focuses on water quality and one that specializes in product identification. Both are quality assets that are growing faster than their industry peers.
Why we love Danaher
In addition to its exposure to secular growing end markets, what makes Danaher such a quality name is the executive track record of execution. Management is constantly making operational improvements through the application of the Danaher trading system. This playbook is Danaher’s competitive advantage, and it has become a powerful source of business improvement. Across the portfolio, Danaher is focused on improving the cost structure, reinvesting for growth and accelerating margins and core growth across its various businesses. It’s continuous improvement, but where it goes best is with mergers and acquisitions, which are Danaher’s bread and butter. Danaher is so good at buying companies and then accelerating growth while improving margins. If you take a look at Danaher’s DBS 2018 preview slideshow at the link here, you’ll see DBS in action.
Danaher’s sustainable and recurring revenue streams, exposure to secular growth end markets, M&A execution, and constant operational improvements have created an attractive long-term growth model. On Danaher Analyst Day in September, management provided long-term guidance on mid single-digit core revenue growth (accelerating 5-6% before 2019), operating margin expansion 50 to 75 basis points, strong free cash flow with conversion (FCF divided by profit or loss) above 100% plus other acquisitions. Putting it all together, Danaher believes he will achieve double-digit earnings per share growth over the long term. Danaher’s continuous operational improvements of a portfolio based on recurring revenue streams have made this company a true profit generator.
We initiate Danaher with a Price target of $ 360, which is roughly 35 times FactSet’s consensus estimate for 2022 earnings per share. The stock isn’t cheap, but Danaher consistently trades at a premium due to its business model quality, management’s track record of mergers and acquisitions and a long history of continuous operational improvements through the Danaher business system. In addition, we believe that this bonus will be justified if basic income growth accelerates from its pre-2019 level, as expected by management. And the current estimate of income for 2022 may be conservative, as favorable winds from COVID-19 (from tests, vaccines and treatments) are proving to be longer lasting than previously thought.
As always, we never like to buy suddenly when we put a new position in stocks for the Charitable Trust. We prefer to move deeper in time, explaining why we are starting relatively small this morning with a choke position. But with stocks down around 5% today and slightly down from their high of around $ 333, we believe that decline has created an attractive entry point.
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(Jim Cramer’s Charitable Trust is long DHR, ABBV, ABT.)