Morningstar | Danaher's Dental Spin-Off Will Further Focus Business on Higher-Growth Life Science and Diagnostics
Danaher is a unique business with impressive historical results, and the company's strategy relies on the success of management's continued capital allocation acumen and integration efforts. Management's historical deals, improvement in underlying business performance, and conservative use of financing suggest the company will remain disciplined, but its strategy has risks. Recent deals like Pall, Nobel, and Cepheid have brought in more innovative industry leaders with higher growth opportunities but at the expense of returns on capital, which have taken a slide over recent years. While we mostly like the long-term outlook for the majority of Danaher’s businesses, but we’d like to see more evidence management won’t overpay for growth. Following the spin-off of Fortive in 2016 and anticipated spin-off of the dental segment in 2019, Danaher has become a major player in the life science and diagnostic market, and we continue to appreciate the direction of management’s capital deployment. We think Danaher’s two largest segments, life sciences and diagnostics, remain attractive areas because of the aging population demographics, growth of personalized medicine, and demand for biologic manufacturing processes. Danaher’s installed equipment helps maintain a sticky customer base as recurring consumables drive cash flow. We see a number of potential avenues for management to continue deploying capital to boost its competitive edge. In diagnostics, for example, Danaher has gained access to the molecular diagnostic through the Cepheid deal, but management may want to further enhance its exposure to molecular and genome tests. On the life sciences side, Danaher could boost its chromatography or spectrometry assets.We imagine the spin-off of the dental segment has stemmed from this segment's weak performance. Although the dental industry's exposure to mostly cash pay services combined with a fragmented customer base remain attractive attributes of the market, the rise in corporate practice buying power and increasing commoditization in many product categories have weakened growth and profitability prospects.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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