Elite Investors back ‘thoughtful’ Danaher after Covid slump

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This article first appeared in De Telegraaf Questor column.

The declining number of UK listed companies is causing concern at home, but international companies and investors are benefiting. An example of this is Danaher (US:DHR) and Abcam.

Abcam was a Cambridge-based biotech darling of the Aim market that left London at the end of 2022 in favor of a listing on the US stock exchange Nasdaq. Since the end of last year, the company has been part of Danaher, the New York-listed life sciences and diagnostics giant with a value of more than $180 billion.

Danaher paid $5.7 billion in cash for Abcam, which makes and sells products, including proteins and reagents, used in medical research. It has added the company to its already extensive offering of medical products and services, ranging from cell manufacturing and drug discovery to the instruments used in clinical testing.

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The real deal

While Abcam isn’t transformative for Danaher – it represents 2.5% of total revenue – top fund manager Neal Kaufman, who owns Danaher shares in the Baron Health Care Fund, says the deal underlines an important part of the investment case: ‘This acquisition reflects Danaher’s thoughtful approach to acquisitions, which has allowed the company to add best-in-class assets into attractive end markets such as bioprocessing and proteomics [the study of sets of proteins].’

Read our profile on Neal Kaufman – an Elite Investor on a Path Less Traveled.

Management, which has acquired hundreds of companies since Danaher’s founding in 1984, aims to grow Abcam’s revenues at high single-digit rates over the long term. This is in line with the group’s core growth objective and impressive for a business group whose revenue last year was just under $24 billion.

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Danaher’s management team is also pleased to be able to reshape the group’s business portfolio through divestments. For example, last year it spun off its environmental services arm Veralto to create a separate publicly traded company that is now worth $24 billion. The company did the same in 2019 with its $3.5 billion dental operation, Envista. In both cases, Danaher shareholders benefited, and it wouldn’t be a surprise if the company did something similar again.

Kaufman and company

Kaufman is one of nine elite investors who hold Danaher in their funds. Each of these portfolio managers belongs to the top 3% of the more than 10,000 equity fund managers that Citywire tracks. The stock’s popularity among smart money investors has led to Danaher receiving a AAA rating.

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Top Three Elite Funders

Sources: Citywire/Morningstar, latest holding data.

Smart deals also attract Kaufman and the other leading fund managers to Danaher, including Danaher’s broad product diversification, high level of recurring revenue and solid core growth targets.

Within the company’s three business units, approximately four-fifths of revenue is recurring. This provides a striking degree of certainty in an industry where profits can be volatile.

Danaher’s expertise in areas such as biologics (drugs made using living cells or organisms) puts Danaher at the forefront of new treatments for diseases such as cancer and autoimmune diseases. Growth should also benefit from rising demand for rapid diagnostics.

Covid bump

However, it is not all plain sailing. Many smaller biotech companies have been mired in a funding crisis over the past two years and have lost orders as a result. The good news is that Danaher said earlier this month that it had noticed an improvement, although this has not yet translated into an increase in orders.

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Revenues also fell last year and will continue to fall this year as the effects of a Covid-19-related sales surge fade and customers deplete excess inventory. Danaher is confident the lull will be short-lived and remains committed to its core growth objectives.

With shares valued at more than 30 times forward earnings, the broader market, as well as the world’s best managers, are also showing confidence that the outlook is improving.

Key Facts – Danaher
Market capitalization $186 billion Price
52 weeks high/low $259 / $182 Return on invested capital
F’cst price for profit 31.5 F’cst dividend yield
F’cst growth in earnings per share 5.2% 12 month share price

Source: FactSet. EPS = earnings per share. Forecasts based on the next 12 months.

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