Shares of Danaher (DHR) were up just 3.28% today.
I say “just” because the company delivered a blow out earnings report today. Danaher reported adjusted earnings of $1.72 per share on $5.88 billion in sales for its third quarter. Analysts had expected earnings of $1.37 a share. Revenue beat analyst estimates of $5,52 billion.
Earnings grew by 62.3% from the third quarter of 2019, helped by an increase in operating margins to 18.5% from 17.7% in the third quarter of 2019. Revenue increased by 34.5% from the year-earlier quarter. As per usual at acquisition-focused Danaher, acquisitions added 24.5% to sales. Organic sales, including organic growth at recent acquisition Cytiva, grew by 14% year over year. Free cash flow climbed 110% from the third quarter of 2019.
The big revenue gains this quarter came from the company’s life sciences segment–roughly 50% of company sales. Revenue for the life sciences unit climbed 72.5% year over year.
In the diagnostics segment revenue (about 32% of sales) grew 18% from the third quarter of 2019.
For the environmental and applied solutions unit, revenue fell 1% year over year.
Today’s close of $233.99 marks another record close for Danaher shares.
Which brings up the question of what to do with this stock, one that Morningstar calculates trades at a 62% premium to fair value.
I think that premium is justified because Danaher sits in both a short-term and long-term sweet spot. Because of the coronavirus, the company saw strong demand for its life sciences and diagnostic tools used to develop vaccines. However, I think the long-term trends in the drug and life sciences segment are extraordinarily strong and support the company’s forecast of low double-digit earnings growth in the long run. A valuation of 50 times earnings is indeed steep, but I’m hard pressed to find very many companies with the growth rate of Danaher and the relatively low-risk growth story at this company that comes from its positioning in the life sciences sector..
I’ve owned Danaher shares in my Jubak Picks Portfolio since June 20, 2017 and in that period they’re up 173%.
If you don’t already own shares, you might want to wait for a potential market pullback in the next few weeks or so before initiating a position. That’s what I’m doing–waiting for a pullback, that is–before adding the shares to my long-term 50 Stocks Portfolio.
If you own the shares, I’d hold them through any short-term market volatility. That’s what I’m doing with the position in my Jubak Picks Portfolio. Today I’m raising my target price on these shares to $292 a share from the current $185. (The shares pay a minuscule 0.32% dividend, even though Danaher recently raised its dividend payout by 15%.)
Full disclosure: I own shares of Danaher in my personal portfolios.