Danaher's Trading Value Belies Logic

Jun. 10, 2019 8:21 PM ETDanaher Corporation (DHR)GE14 Comments
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  • DHR's revenue is growing in the low-single digit range, and its operating income is in decline.
  • Its 22x EBITDA multiple belies logic.
  • Sell DHR.
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Danaher Employee. Source: FortuneDanaher employee. Source: Fortune

Danaher (NYSE:DHR) made major news in February when the company announced it would acquire GE Biopharma (GE) for $21.4 billion. The transaction drew attention for its sheer size and potential to make a dent in GE's debt load. It could also goose Danaher's growth. GE Biopharma is expected to fit into the company's Life Sciences division, which offers research tools that scientists need to study genes, proteins, metabolites and cells, in order to understand the causes of disease and test new drugs and vaccines.

Danaher has historically been able to grow its top line in the high single-digits, yet growth slowed in Q1 2019. Total revenue of $4.9 billion grew 4% Y/Y, unbecoming of a growth company.

DHR Q1 2019 revenueLife Sciences is the company's largest segment at 33% of total revenue. It is also the fastest-growing, exhibiting revenue growth of 10% Y/Y. The company's other business segments generated revenue of about $3.3 billion that only grew 1% Y/Y. The Dental business (offers products and services to treat ailments for teeth and gums) experienced a revenue decline.

Operating profit of $724 million actually declined 3% Y/Y. Gross profit grew 3% as gross margin was flat at 56%. However, growth in SG&A (up 5% Y/Y) and R&D costs (up 4% Y/Y) outstripped growth in gross profit. Operating profit margin was 15%, down about 100 basis points versus the year earlier period. On a segment basis, Dental reported a 7% operating profit. Its profit margins are much less than the total company's, which likely explains why Danaher wants to spin off the operation into a separate publicly-traded company.

Key Events

The following key events could potentially goose top line growth and improve margins.

Acquisition Of GE Biopharma

Market chatter suggests the purchase price for GE Biopharma represents 17x 2019 EBITDA. I also

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This article was written by

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The Shock Exchange has a B.A. in economics and MBA from a top 10 business school. He has over 10 years of M&A / corporate finance experience. Currently head the New York Shock Exchange, financial literacy program based in Brooklyn, NY.His book, "Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead", predicted pain ahead for the U.S. economy and financial markets.In 2014 the law firm of Kirby, McInerney, LLP brought a class action lawsuit against Molycorp, Inc. for "materially misleading statements" in its financial statements. Kirby, McInerney used investigative journalism from the Shock Exchange to buttress its case. That's the discipline the Shock Exchange brings to every situation he covers for SA.

Disclosure: I am/we are short GE. 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.

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