4. Danaher Corporation (NYSE:DHR)
Third Point’s Stake Value: $511,926,000
Number of Hedge Fund Holders: 98
Another one of Dan Loeb’s top growth stock picks is Danaher Corporation (NYSE:DHR). The stock accounts for 6.5% of Third Point’s Q1 2024 portfolio. Danaher Corporation (NYSE:DHR) is a diversified conglomerate that manufactures and markets medical, industrial, and commercial products and services across the globe. The company operates through three segments: Biotechnology, Life Sciences, and Diagnostics. DHR is among Dan Loeb’s longest held positions and here’s what the activist investor had to say about the company in his Q2 2023 investor letter:
“Danaher has created significant value over decades through its unique operating system and superior M&A, and its low leverage balance sheet should allow it to take advantage of depressed valuations in the life science tools sector to continue to add to its portfolio. More importantly, Danaher stands to benefit from the surge in new projects and drug discovery spending occurring in the post-Covid world. Danaher’s Biotechnology and Life Sciences segments are poised to accelerate from data analytics and computational biology, which will grow meaningfully as AI and eventually quantum computing technology advance. We would not be surprised to see Danaher’s growth rate move from high single digits to the low teens over time, implying a long runway for Danaher’s business and stock price to increase sustainably while they enable the discovery and manufacturing of key life-saving drugs.”
Danaher Corporation (NYSE:DHR) has a track record for successfully acquiring and integrating businesses (Beckman Coulter in 2011, Pall Corporation in 2015, and General Electric Life Sciences in 2020). The company recently acquired Cambridge-based biotech company Abcam, that makes proteins and reagents, for $5.7 billion in December 2023. The company’s Kaizen-based M&A philosophy has helped it acquire hundreds of businesses since 1984, some of which were troubled, and turn them into profitable entities. Danaher Corporation (NYSE:DHR) has grown its portfolio and global footprint across all its segments and has demonstrated strong capital allocation skills. In 2016, it spun off its industrial businesses into a separate industrial technology conglomerate Fortive in 2016. In 2019, it spun off its dental business into Envista in 2019. And in 2023, the group spun off its environmental services arm into a separate listed entity Veralto. These moves have created immense shareholder value and show how DHR’s continuous improvement-oriented approach throughout its operations has worked and will work for the years to come.
Why should growth investors who also want a bit of value buy DHR? Over the past 10 years, the company has grown its free cash flow at a compound annual growth rate of 5.8%. It converts over 100% of its profits into free cash flow and ended 2023 with an FCF of $5.78 billion (net income was $4.74 billion). It has a highly recurring revenue business model (over 50% of its revenue is recurring across all its segments), driven by consumables like filters and reagents. This limits its downside risk to business cycles and translates into stable earnings. Moreover, new drug discovery spending and projects are expected to be a long-term catalyst for this company. One of its most opportunistic end-markets is bioprocessing i.e. its biotech segment, in the long term, as biotech spend picks up pace and recovers later in 2024. In Q1 2024, the company reported a 17% decline in core revenue in its biotech segment, led by weak demand from China. However, management remains optimistic and expects the new FDA wins for biologic and genomic medicines in 2023 to drive core revenue growth in its bioprocessing business to high-single digits, in the long term.
The company’s long-term business strategies, successful restructuring toward becoming a pure-play company with exposure to life sciences and diagnostics, and cash flow generation capabilities make DHR an attractive idea while it trades at 8.4 times its sales, close to its 5-year average of 6.7x.
