What Should You Do With Danaher Stock At $250 After Q1 Beat?

Danaher stock (NYSE: DHR), a conglomerate with products in life sciences, biotechnology, and diagnostics fields, recently posted its Q1 results that exceeded the street expectations. The company reported revenue of $5.8 billion and adjusted earnings of $1.92 per share, compared to the consensus estimates of $5.3 billion and $1.60, respectively. The market gave a thumbs up to its results with a 7% move on its stock following the earnings release. In this note, we discuss Danaher’s stock performance, key takeaways from its recent results, and valuation.

Firstly, looking at its stock performance, DHR stock has witnessed gains of 15% from levels of $220 in early January 2021 to around $255 now, vs. an increase of about 35% for the S&P 500 over this roughly three-year period. However, the increase in DHR stock has been far from consistent. Returns for the stock were 48% in 2021, -19% in 2022, and -13% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that DHR underperformed the S&P in 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Health Care sector including LLY, UNH, and JNJ, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could DHR face a similar situation as it did in 2023 and underperform the S&P over the next 12 months — or will it see a strong jump? From a valuation perspective, we think DHR stock is fully valued. At its current levels of around $250, DHR stock is trading at 7.8x revenues, compared to the 7.1x average over the last five years. Our Danaher (DHR) Valuation Ratios Comparison has more details.

Danaher’s revenue of $5.8 billion in Q1 was down 2.5% y-o-y, as a 6% growth in Diagnostics revenue and a 2% rise in Life Sciences sales, were more than offset by an 18% fall in Biotechnology sales. This can be attributed to lower inventory levels and a thinning of demand for bioprocessing and protein research products. Danaher’s operating margin contracted 290 bps y-o-y to 22.6% in Q1. Lower revenues and margin contraction resulted in earnings of $1.92 on a per share and adjusted basis, compared to $2.05 in the prior-year quarter. Looking forward, the company expects its core revenue to decline in low single-digits in 2024, primarily due to lower expected sales in the Biotechnology segment.

Although Danaher posted an upbeat Q1, the rise in its stock price following the earnings announcement captured the positives, in our view. We think that DHR stock is fully valued now at around $250 and investors willing to enter will likely be better-off waiting for a dip for robust long-term gains.

[1] Returns as of 4/24/2024
[2] Cumulative total returns since the end of 2016

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