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Healthcare is one of the worst-performing S&P 500 sectors over the last 12 months. And while the sector in general is a tough one, there’s one name that stands out to me right now.
Shares in Danaher (NYSE:DHR) have fallen 29% in the last year. But I think the underlying business is very attractive and a discounted share price has put it firmly on my radar at the moment.
Durable growth
Danaher is a leader in supplying products and services to the life sciences, diagnostics, and biotechnology industries. These are growing and highly regulated industries.
This gives the firm a lot of scope to increase prices to offset inflation without substantially weighing on demand. On top of this, the company has a strong record of growing through acquisitions.
Buying other businesses is always risky, but Danaher does have some unusual advantages when it comes to acquisitions. A key part of this is the firm’s culture, of efficiency and ongoing improvement.
The ability to improve its subsidiaries creates a margin of safety for the firm and it’s why the stock is up over 200% over the last decade. But things haven’t been going quite so well lately.
Challenges
The Covid-19 pandemic caused a surge in demand for Danaher’s products and sales jumped as a result. Since then, however, the situation has reversed as customers use up their excess inventories.
As a result, the firm’s financial performance has faltered lately. The most recent earnings update reported a decline in revenues, and management stated its expectation this would continue.
The risk for investors is that – even after the latest decline – the stock is priced for growth. And if inventory levels stay higher for longer, this growth might take a while to materialise.
I think, however, that the firm’s key competitive advantages are still firmly intact. So while the market is focusing on the next six months, I’m looking further ahead.
Valuation
On an adjusted basis, the stock trades at a price-to-earnings (P/E) ratio of around 25. That looks quite high, but I don’t think this is necessarily the best metric to use for valuing Danaher shares.
Earnings have gone from unusually high to unusually low as a result of the volatile demand over the last few years. And this makes the P/E ratio a less meaningful way of measuring value.
By contrast, Danaher’s book value (the difference between its assets and its liabilities) has been relatively steady. On a price-to-book (P/B) basis, however, it’s trading at its lowest level since 2019.
This indicates to me that the stock is unusually cheap and that’s why it’s on my list of shares to consider buying in June. The latest decline puts it in territory that looks unusually attractive to me.
Long-term investing
Danaher has gone from a small investment vehicle to an acquirer of industrial tools companies, to a life sciences conglomerate. And at each stage, its focus has been on the long term.
I think that approach aligns well with investors who have a long-term outlook and it’s a key part of what attracts me to the business. I’m hoping to find similar success with the stock in my portfolio.
