After you receive this Alert, we will be initiating a position in Danaher (DHR), buying 200 shares at around $81.20. Following the trade, DHR will represent roughly 0.62% of the portfolio.
We are bringing Danaher out of the bullpen and into the portfolio, as we believe the time is right given the stock’s range-bound performance since the company spun off Fortive (FTV) last year. You can read our detailed analysis of Danaher’s business in our bullpen initiation towards the end of last year here .
While we had preferred to wait for the stock to cross back under $80, we want to take advantage of the slight down day today to initiate a small position in the name, leaving ample room to scale further on any broader decline.
We believe DHR’s new, leaner and meaner business model, which is expected to drive outsized growth with continued strong margins, should command a higher multiple as the company executes on recent acquisition integration plans. Overall, we believe DHR’s investment thesis has been misunderstood, given recent troubles across the health-care industry, but also due to the uncertainty that is always baked into a transition of this magnitude.
We recognize that the company must deliver on its plans, but we trust the best-in- class management team to take this company to the next level. We do note, however, that patience is required for this investment, as investors are in a wait-and-see mode as the company transitions.
Recent analyst days and conference presentations have been encouraging, with management noting, for the short-term, that fourth quarter tracked roughly along with expectations, even despite strong FX headwinds. The overall message has been that the company will utilize its traditional DBS (Danaher Business System) operational playbook to continue to drive execution, but the new look of the company, combined with additional growth assets, will drive a better-than-historical growth profile moving forward.
We are initiating the name with a $94 price target, which represents roughly 22x 2018 consensus EPS of around $4.30. Importantly, we believe there is room for the stock’s multiple to expand over time, above its current 20x 2017 EPS, as investors begin to appreciate the higher-growth business model. While the top line will surely benefit from the company’s focus on growing businesses (e.g. water quality, dental, life sciences, etc), we see a significant opportunity for margin expansion following the Fortive spinoff, as the businesses left over are mostly from recent acquisitions (e.g. Pall), where management can drive synergy execution and utilize the DBS system for operational improvements.