I have had some doubts about whether Danaher (DHR) had enough of a catalyst to carry it upward during the slowdown in earnings predicted for at least the first three quarters of 2019? Yes, the company was selling off its dental unit, which would leave the company much closer to a pure play on water and tools for the drug sector (and other industrial users that depend on extra clean water.) But would that be enough? Well, this morning brought a much bigger catalyst. Danaher will buy General Electric’s (GE) biopharma business for $21.4 billion (or $20 billion after a tax break.)
Danaher had tried to buy the business a year ago–only to be rebuffed by General Electric. What changed since then? General Electric’s plight has gotten more severe and new GE CEO Lawrence Culp has taken a very aggressive stance toward turning around the company. GE was looking to sell its entire healthcare unit, or, in more recent plans half of it, but the sale of the biopharma unit, about 15% of healthcare revenue, at this price was a chance to get more for a GE asset. It also didn’t’ hurt that before he took over as GE CEO in September, Culp was the CEO of Danaher.
The stock market really likes this deal. Danaher shares were jus 8.3% to $122.86 as of 3 p.m. New York time on February 25. Danaher’s ideal business is one with high growth and high margins. Sales would include a large percentage of consumables. And the consumer base should be sticky. Check, check, check and check. Consumables are near 75% of sales in GE’s biopharma division. EBITDA margin (earnings before interest, taxes, depreciation and amortization) is nearly 40%. Danaher projects that the acquisition will add 45 cents to 50 cent to adjusted earnings per hare in the first year with the contribution to earnings from the acquired business doubling within five years.
And what’s not to like. The acquisition fits into Danaher’s current business strategy like a hand into a glove.After the 2016 spin off of its test and measurement, industrial technologies, and petroleum dispensing business into Fortive (FTV) and the anticipated 2019 sale of its dental business, Danaher will be focused on life sciences, diagnostics, product ID, and water quality.The acquisition of GE’s biopharma business gives Danaher an important size boost that should enable the company to add more big customers. In the diagnostics segment, for example, Danaher was No. 4 before this deal. And the margins in the newly acquired business certainly won’t do anything to hurt the upward trend in profit margins at Danaher. Before the deal Morningstar projected that operating margins would climb to 22% in 2022 from 17.1% in 2018.
For the fourth quarter of 2018 Danaher reported earnings of $1.28 a share, a penny above the Wall Street consensus. Revenue climbed 6.2% year over year to $5.4 billion agains the Wall Street projection of $5.33 billion.For the first quarter of 2019, Danaher projected earnings of $1.00 to $1.03, in line with Wall Street expectations for earnings of $1.03 a share. For the full year, the company saw earnings of $4.75 to $4.85 a share versus the Wall Street consensus of $4.82. (Remember all guidance is pre-GE deal.)
The stock is a member of my Jubak Picks portfolio. The shares are up 43.85% since I added them to this portfolio on June 20, 2017. Today, February 25, I’m raising the target price to $135 from the prior $112.
