Morningstar | Boosting Narrow-Moat Danaher's FVE on Higher Growth Prospects After GE Biopharma Acquisition. See Updated Analyst Note from 25 Jun 2019
After taking a fresh look at Danaher, we are boosting our fair value estimate to $120 per share from $112 to reflect its higher growth prospects related to the pending GE Biopharma acquisition. Adding the GE Biopharma business should contribute to Danaher's sustainable competitive advantages, as well, by boosting exposure to the sticky biopharmaceutical development and manufacturing business. Overall, the attractive underlying fundamentals of Danaher's businesses contribute to our narrow moat rating, despite constraints on returns on invested capital related to ongoing acquisition activities.In 2019, Danaher plans to acquire GE Biopharma for $20 billion net of tax benefits, or 17 times EBITDA, and plans to sell a stake in its dental segment to other investors through an initial public offering. We recognize these activities as attractive for Danaher from a business quality perspective, as the company looks set to cut its exposure to the relatively low-margin and slow-growing dental segment and boost its exposure to the high-margin and moderately-growing life sciences business. However, the significant invested capital being paid could keep Danaher’s returns on invested capital near its capital costs for several years. Also, the company's willingness to boost financial leverage to make the GE Biopharma acquisition puts some pressure on this deal, in our opinion. Positively, the pruning of Danaher's dental segment could provide an opportunity to materially reduce leverage after the acquisition.
From a valuation perspective, we believe Danaher's shares are moderately overvalued. Danaher's shares closed at a 20% premium to $120 per share fair value estimate as of June 21 and traded at roughly 30 times projected earnings. Our fair value estimate values Danaher's stock at 25 times earnings and incorporates organic revenue growth of 6%, adjusted earnings per share growth of 10%, and free cash flow growth of 13% compounded annually during the next five years.
Danaher designs, manufactures and markets medical, industrial and commercial products and services. The company's segments include: Life Sciences, which provides research tools to study genes, proteins, metabolites and cells, in order to understand the causes of disease, identify therapies and test drugs and vaccines; Diagnostics, which provides analytical instruments, reagents, consumables, software and services that hospitals, physicians' offices, reference laboratories and other critical care settings use to diagnose disease and make treatment decisions; and Environmental and Applied Solutions, which provides products and services to protect resources and global food and water supplies.
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