Danaher continues to prune its portfolio of businesses

Business Strategy & Outlook

Through the Danaher Business System, Danaher aims for continuous improvement of its scientific technology portfolio by seeking out attractive markets and then making acquisitions to enter or expand within those fields and divest assets that are no longer seen as core. After acquisitions, Danaher aims to accelerate core growth at acquired companies by making R&D and marketing-related investments. It also implements Lean manufacturing principles and administrative cost controls to boost operating margins. Overall, Danaher’s strategic moves are appreciable, which have pushed it into attractive end markets with strong growth prospects and sticky, recurring revenue streams. For example, recurring revenue could reach about 80% of sales after the pending environmental and applied solutions (EAS) group divestiture in late 2023.

Danaher’s acquisition-focused strategy has contributed to it becoming a top-5 player in the highly fragmented and relatively sticky life science and diagnostic tool markets less than 20 years after its first acquisition in the space (Radiometer in 2004). Recent life science and diagnostic acquisitions have included Beckman Coulter, Pall, and Cepheid. In early 2020, Danaher completed the acquisition of GE Biopharma, now called Cytiva, which fills in some gaps for Danaher within the biopharmaceutical development and manufacturing tool market. Within the life sciences field, the end market is particularly attractive given its strong growth trajectory, high margins, and high switching costs associated with regulatory and reproducibility concerns of end users. Management has started making more acquisitions in that space, such as Aldevron, and expects more tuck-in acquisitions in this and other end markets. Danaher also continues to prune its portfolio of businesses. The planned EAS group divestiture is just the latest for the company that distributed shares in the now publicly traded Fortive Corp (industrials) in 2016 and Envista (dental) in 2019 directly to shareholders. More divestitures are possible in the future, as well.

Financial Strengths

Danaher’s acquisition-focused strategy makes financial flexibility and capital market access important. In recent years, the company has issued debt to make significant acquisitions, such as Beckman Coulter (2011), Pall (2015), Cepheid (2016), and Cytiva (2020) before deleveraging to more manageable levels again. At the end of 2021, gross leverage stood at just 2 times, including COVID-19-elevated profits. Danaher has expressed a desire to maintain its investment-grade status, and it should be achievable. However, the company is highly acquisitive, and future acquisitions could significantly boost leverage from current levels before the company aims to return to more manageable levels.

Bulls Say

The Danaher Business System focuses on continuous improvement, including the acceleration of core growth and margin expansion through marketing initiatives and innovation, which appears positive for Danaher’s long-term prospects.
Danaher’s shift to healthcare markets has created a less cyclical business in attractive markets with high barriers to entry and impressive recurring consumables revenue streams.
Danaher has plenty of opportunities to consolidate and improve performance in its targeted life science and diagnostic end markets.

Company Description

In 1984, Danaher’s founders transformed a real estate organization into an industrial focused manufacturing company. Through a series of mergers, acquisitions, and divestitures, including the Fortive separation in 2016, Danaher now focuses primarily on manufacturing scientific instruments and consumables in three segments: life sciences, diagnostics, and environmental and applied solutions. In late 2019, Danaher separated from its dental business through an initial public offering process, and in early 2020, it acquired GE’s Biopharma business, now called Cytiva, which added to its life sciences segment.

(Source: Morningstar)

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