We care much more about where a stock is going than where it’s been. With the spin-off of Veralto (VLTO) complete, we decided to look at the path ahead for Danaher (DHR) — now free of its slower-growing, lower-margin water business. In the separation , we decided to keep the 173 shares of Veralto we received due to our ownership of 520 shares of Danaher. We’re hoping that each can grow faster independently than they could together. As Club members know, we have always regarded Danaher as one of the best-run companies in the world. However, we certainly haven’t been pleased with its year-to-date decline of nearly 8% compared to the 10% gain in the S & P 500 . DHR YTD mountain Danaher YTD Going forward, we expect the underlying fundamentals at the more nimble Danaher to improve. So, we can’t let our current frustrations get the better of us. Rather, we must consider the setup down the road and the current valuation at these depressed levels. When we do that, we see a very favorable picture heading into next year and three reasons to be bullish. 1. For starters, let’s consider the portfolio renewal that’s underway at Washington, D.C.-based Danaher. Management is currently working to finalize the acquisition of U.K.-based life sciences company Abcam (ABCM). That deal, coupled with the Veralto spin-off, are two moves that stand to accelerate earnings growth. The Veralto separation is already expected to help Danaher’s core growth profile. Veralto management is targeting long-term core growth in the mid-single-digit range on a percentage basis, whereas Danaher management sees ex-Veralto growth at a high-single-digit rate over the long term. Removing a slower-growth business is akin to removing an anchor on growth. So, as it stands we’re already looking at a business that stands to see overall growth accelerate. Then factor in the acquisition of Abcam’s high-single-digit growth rate, and we’re looking at a faster-growing Danaher in 2024 than what we saw in 2023. Danaher management believes they can close the Abcam deal around the middle of next year. 2. It’s not just a reorganization of Danaher’s operating businesses that stands to boost fundamentals. We should also see improvement next year in the bioprocessing end market — which would be a boon to the part of Danaher’s business that sells tools and services used in the development and manufacturing of drugs. Inventory destocking has been a major headwind for Danaher and others in 2023 as larger customers — responsible for about 70% of the company’s bioprocessing sales — have had to work through a glut of inventory as the world normalizes post-Covid. In a Tuesday note to clients, Deutsche Bank said that “recent data points from field checks with industry participants support a recovery of the bioprocessing end market in 2024 with the most salient being a top 10 biopharma [which was not named] indicating that it is no longer drawing down inventory.” The analysts said that while they’re not looking at the rebound just yet, their industry checks are consistent with their previously held view that the market is set to trough in December before returning to growth by the middle of 2024. That means that roughly 70% of Danaher’s bioprocessing business could see a rebound in demand over the next few quarters. Investors could opt to wait until the rebound is confirmed, but the market is forward-looking — so more often than not, if you wait for confirmation, you will have missed a good deal of the expected move higher in the stock. 3. The bioprocessing industry, which includes emerging biotech companies and others working on early-stage projects, has also taken a major funding blow after the March failure of Silicon Valley Bank. Combined with a two-year drought in the market for initial public offerings (IPOs), much-needed liquidity at many of these would-be Danaher customers has dried up. As a result, they’re seeing pressure on their operating and capital expenditure budgets — both of which drive sales for Danaher, which has also taken a hit. However, with recent signs of life in the IPO market, we think the worst could be behind us as we enter 2024. The one caveat here, and it’s a big one, is interest rates. While the path of inflation will determine the ultimate path for borrowing costs, the level of rates we are currently witnessing may make it harder for companies to come public and could strain the ability of smaller companies to get enough funding. As we approach the new year, we’ll be looking for more signs that an actual IPO rebound is taking place. Armed with those three reasons to be optimistic, the question then becomes about valuation. Are these tailwinds already being baked in? Or is there an opportunity here for those willing to bet on the Federal Reserve pulling off a soft landing or avoiding a recession altogether? Over the past five years, Danaher has traded at an average of 24.7 times enterprise value to EBITDA (earnings before interest taxes, depreciation, and amortization), with a high of 37.9 times and low of 17.4 times. Excluding Veralto, initial estimates (we haven’t seen all analysts update estimates for Danaher ex-Veralto yet) put Danaher’s 2024 EBITDA at around $8.4 billion. Given an enterprise value of roughly $171 billion, shares are trading at around 20.4 times preliminary 2024 EBITDA estimates, well below the five-year average. If shares were to trade up to that five-year average of 24.7 times, however, we would be looking at a share price closer to $270. Nonetheless, acknowledging the risk high rates pose to the IPO market and the economy more broadly should we learn that the Fed overtightened, we will stick with our $250-per-share price target for the time being, representing about 23 times our $8.4 billion estimate. Obviously, there is some back-of-the-envelope math here and the 2024 EBITDA estimate will be refined in the coming weeks as more analysts update their models. However, we think this example serves to demonstrate that there’s a solid margin of safety built into the stock at current levels, especially considering our view that the underlying fundamentals are set to improve as 2024 gets underway. Bottom line Given the setup we see into 2024 — with end markets set to improve, IPO funding coming back online and a portfolio re-organization underway that stands to reaccelerate organic growth — we would argue that shares should trade at a premium to the 5-year average, or at the very least in line with it. We certainly can’t blame anyone for being frustrated with this name. However, we think the unemotional, fundamental takeaway here is that this is the time to start getting more bullish on Danaher, not join in on the pessimism gripping the market more broadly. It’s also worth noting that our portfolio stands to benefit from any growth in the stand-alone shares of Veralto. (Jim Cramer’s Charitable Trust is long DHR, VLTO. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
In this photo illustration, Danaher Corporation logo is seen displayed on a smartphone and PC screen.
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