phuttaphat tipsana/iStock via Getty Images

phuttaphat tipsana/iStock via Getty Images

Danaher Corporation's (NYSE:DHR ) long-term vision is based on the company's unmatched ability to improve the lives of its customers through its diverse product portfolio, which includes innovative and market-leading solutions in life sciences, medical diagnostics, and environmental and applied solutions. Despite this, the company's stock price fell 20% from its high last year as a result of its topline concerns. In fact, analysts at Well Fargo downgraded DHR with a price target of $265. This is true, especially given its declining core sales growth of 12% year on year in Q1 2022, compared to 19% growth in Q1 2021. However, the management's outlook remains unchanged, with core sales for fiscal 2022 expected to produce higher figures than its challenging fiscal 2021 which is induced by the pandemic, growing in the mid-single digits.

Today, DHR produced a slowing margin which may serve as its bearish catalyst to force the stock to make a new low. However, despite the temporary inefficiencies, the company remains solid with its improving liquidity and growing cash flow. It recently announced the conversion of its preferred stock which may pose a risk of dilution, however, while looking at the other side, it may ultimately enhance common shareholder value. Additionally, DHR enjoys a positive dividend grade from Seeking Alpha's quant, making it more attractive at today's weakness. DHR currently offers a 0.40% dividend yield, which could improve at its potential new low.

DHR: Total Revenue YoY Growth (Data from Seeking Alpha. Prepared by InvestOhTrader)

DHR: Total Revenue YoY Growth (Data from Seeking Alpha. Prepared by InvestOhTrader)

The company experienced a strong tailwind from the impacts of COVID-19. As you can see in the image above, DHR's total revenue YoY growth boosted to a double digit starting from fiscal 2020 up until its fiscal 2021 and currently projected by analysts to generate a positive but slower growth of 4.63% in its next fiscal year. This is a result of the DHR's impressive strategic acquisitions over the last decade; the most notable is its recent acquisition of Aldevron, a leader in biological science, which is one of the industry's largest M&A transactions of 2021. These acquisitions will help Danaher position itself in the growing global genomics market which is expected to reach $94.65 billion in 2028. This, in my opinion, will outweigh the company's current risk of a dwindling pandemic tailwind and will enable sustainable growth in its life science segment outside of the COVID-19 opportunity. In fact, despite the challenging pandemic-induced figures, the management provided a positive outlook for its core sales growth, excluding the related COVID-19 impacts, to be around in the high single digits next fiscal year. This will result in a potential double-digit growth on a two-year stack perspective which may serve as a strong bullish catalyst for DHR. Additionally, the management expressed confidence in the company's ability to capitalize on opportunities outside the pandemic in their recent earnings conference call.

So first of all, as you think about the activity levels outside of COVID in the bioprocessing business, it's important to see what's going on in clinical trials. And I've talked about this, but you know that the project pipeline for monoclonal antibodies is 50% larger today than it was 5 years ago. For cell and gene therapy, it's 10x larger, driving extraordinary activity here in the clinical trial area.

… Now another point to take here is monoclonal antibodies are becoming the standard of care and the predominant class of biologic drugs. So what's going on in monoclonal antibodies is the primary growth driver in the market and also for our business and recently launched products that are ramping to new treatment and new indications are driving an exceptional amount of volume here. And then you add to that, that emerging markets and high-growth markets, such as China and India, are starting to have access to these monoclonal antibody treatments that provides additional and significant volume leverage. At the same time, you have biosimilar growth, Vijay. So these biosimilars are leveraging the fact that some of the biologic drugs, monoclonal antibody that are higher volume are starting to come off patent, and that's increasing the penetration of those drugs throughout the world where the penetration has been lower. And that's providing another growth impetus.

… We've been talking about single-use technology and their adoption for a while, which is an additional leverage growth vector within the bioprocessing business. So all that helped the activity that we talked about provides for volume, but SUT on top of that is substituting more traditional technologies and is growing even faster. And we have well over $1 billion of single-use technology. And we've just announced that our third new plant coming on for single-use technologies in Cardiff, Wales. So we feel very confident on the basis of what's going on outside of COVID. Source: Q1 2022 Earnings Call

DHR: Company Valuation (Prepared by InvestOhTrader)

DHR: Company Valuation (Prepared by InvestOhTrader)

DHR still has an upside potential as of today, despite the rising yield environment, thanks to its impressive topline projection. In my opinion, its current bearish sentiment will be priced in at around $230ish which will provide investors and traders a meaningful margin of safety. Additionally, the stock is trading at a trailing 29.61x earnings multiple, which is lower than its five-year average of 38.72x, and at a trailing EV/EBITDA multiple of 19.26x, lower than its five-year average of 23.93x.

DHR: DCF Model (Data from Seeking Alpha and Yahoo! Finance. Prepared by InvestOhTrader)

DHR: DCF Model (Data from Seeking Alpha and Yahoo! Finance. Prepared by InvestOhTrader)

I used analysts' estimates to project the company's total revenue as shown in the image above. In my opinion, DHR has resources to sustain its growing topline especially with its effective M&A track record and with a strong CAPEX spending outlook to be around $1.5 billion for fiscal 2022. I projected a slower operating margin of 26.8% in fiscal 2022, due to the rising inflation and impaired operation in Russia. Currently, DHR's operating margin is down to 27.71% recorded in Q1 2022, in comparison to 29.70% from the same quarter last year. Despite the current slowdown which affects its current net margin as well, I believe this is only temporary and will improve as projected in the model above. Despite projected changes in working capital, I believe this is quite conservative, especially considering the company's strong customer relation.

So we are very, very close to our customers, working together with them with their manufacturing schedules to ensure that we're able to not only meet their needs but also to ensure that we don't have inventory buildup in the system. So could there be pockets of that perhaps on the margin, but generally speaking, we don't see a significant buildup in the supply chain. Source: Q1 2022 Earnings Call

DHR also suffers from a bearish sentiment from its declining net margin on a quarterly basis with its 22.44% recorded in Q1 2022, down from 24.82% in Q1 2022. However, looking at its annual figures, we can see that DHR is significantly better than it was pre-pandemic. It generated a trailing net margin of 21.32%, exceeding its 16.36% in fiscal 2020 and 16.79% in fiscal 2019.

DHR: Growing Normalized Basic EPS Trend (Data from SeekingAlpha.com. Prepared by InvestOhTrader)

DHR: Growing Normalized Basic EPS Trend (Data from SeekingAlpha.com. Prepared by InvestOhTrader)

Additionally, DHR delivered strong earnings per share growth, as illustrated above, and an impressive free cash flow margin of 23.65%, up from its 5-year average of 21.14%.

DHR: Growing ROE Trend (Data from SeekingAlpha.com. Prepared by InvestOhTrader)

DHR: Growing ROE Trend (Data from SeekingAlpha.com. Prepared by InvestOhTrader)

Contrary to temporary margin contraction leading to a lower trailing ROE of 14.7% than 14.91% recorded in fiscal 2021, it is still above its 5-year average of 10.3%. To summarize, DHR remains more profitable than it was pre-pandemic.

DHR: Weekly Chart (TradingView.com)

DHR: Weekly Chart (TradingView.com)

DHR is currently near its support zone, but bulls are being challenged by the bearish sentiment generated by the crossover of the 20 and 50-day simple moving averages, as illustrated in the chart above. Looking through the lens of its MACD indicator, it reflects the same sentiment, as its MACD remains in negative territory. However, I believe bears are currently showing some price exhaustion at today's price and may potentially respect its $250ish support zone.

With today's sentiment, where the majority of companies' margins are impacted by the high inflationary environment, examining DHR's balance sheet and overall stability is a more prudent approach. Danaher shows a better P/B ratio of 4.19x and P/CF of 21.36x than its peer, Thermo Fisher Scientific (NYSE:TMO), which has a 5.03x P/B ratio and P/CF ratio of 21.88x. Additionally, looking at DHR's improving trailing debt to EBITDA of 2.18x, which is better than its 5-year average of 3.15x and TMO's trailing 2.83x, we can assume that the former is efficiently utilizing its debt resources relative to its EBITDA. On April 12, 2022, the company announced the conversion of its 4.75 percent Series A Mandatory Convertible Preferred Stock (DHR.PA) to common stock at a ratio of 1:6.6632 and the payment of a final dividend of $11.875 per share to preferred stockholders on April 15th. This may result in a temporary dilution, but it will also relieve some of DHR's annual obligations, and combined with its improving debt/EBITDA ratio and undisrupted growing free cash flow, we may see further dividend growth, making this stock attractive at today's price. Hence, gradually scaling in at today's price is a good strategy for building a stake in the health care sector.

Thank you for reading and good luck!

This article was written by

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in DHR over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.