Danaher (DHR) Stock on the Rise

Diagnostics & Research company Danaher is taking Wall Street by surprise today, climbing to $268.07 and marking a 3.5% change compared to the S&P 500, which moved 1.9%. DHR is -12.26% below its average analyst target price of $305.52, which implies there is more upside for the stock. As such, the average analyst rates it at buy. Over the last year, shares of Danaher have offered a similar return to the S&P 500, moving -21.0%.

Danaher Corporation designs, manufactures, and markets professional, medical, industrial, and commercial products and services worldwide. The company is part of the healthcare sector. Healthcare companies work in incredibly complex markets, and their valuations can change in an instant based on a denied drug approval, a research and development breakthrough at a competitor, or a new government regulation. In the longer term, healthcare companies are affected by factors as varied as demographics and epidemiology. Investors who want to understand the healthcare market should be prepared for deep dives into a wide range of topics.

Danaher's trailing 12 month P/E ratio is 29.6, based on its trailing Eps of $9.07. The company has a forward P/E ratio of 25.7 according to its forward Eps of $10.42 -- which is an estimate of what its earnings will look like in the next quarter. As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US healthcare companies is 13.21, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

To better understand DHR’s valuation, we can divide its price to earnings ratio by its projected five-year growth rate, which gives us its price to earnings, or PEG ratio. Considering the P/E ratio in the context of growth is important, because many companies that are undervalued in terms of earnings are actually overvalued in terms of growth.

Danaher’s PEG is 4.17, which indicates that the company is overvalued compared to its growth prospects. Bear in mind that PEG ratios have limits to their relevance, since they are based on future growth estimates that may not turn out as expected.

An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of Danaher's gross profit margin trends:

Date Reported Revenue ($ MM) Cost of Revenue ($ MM) Gross Margins (%) YoY Growth (%)
2021-12-31 29,453 11,501 60.95 8.88
2020-12-31 22,284 9,809 55.98 0.43
2019-12-31 17,911 7,927 55.74 -0.16
2018-12-31 19,893 8,786 55.83 n/a
  • Average gross margin: 57.1 %
  • Average gross margin growth rate: 3.1 %
  • Coefficient of variability (lower numbers indicating more stability): 4.5 %

Danaher's gross margins indicate that its underlying business is viable, and that the stock is potentially worthy for investment -- as opposed to speculative -- purposes.

To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in Danaher's free cash flow, which was $7,064,000,000.00 as of its most recent annual report.

This represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With its strong cash flows, DHR is in a position to do either -- which can encourage more investors to place their capital in the company. Over the last four years, the company's free cash flow has been growing at a rate of 30.8% and has on average been $4,790,850,000.00.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Danaher's P/B ratio is 4.3 -- in other words, the market value of the company exceeds its book value by a factor of more than 4, so the company's assets may be overvalued compared to the average P/B ratio of the Healthcare sector, which stands at 4.07 as of the third quarter of 2022.

Since it has an inflated P/E ratio, an average P/B ratio, and a steady stream of positive cash flows with an upwards trend, Danaher is likely overvalued at today's prices. The company has moderate growth prospects because of an inflated PEG ratio and consistent operating margins with a positive growth rate. We hope you enjoyed this overview of DHR's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.