Danaher: Spinoff of Veralto Operations Pushes Down Danaher’s Fair Value Estimate Moderately
Narrow-moat Danaher DHR performed a tax-free spinoff of its environmental and applied solutions group, Veralto, to shareholders. We have reduced our fair value estimate to $243 per share from $265 to reflect this distribution of assets. Danaher’s shares are trading slightly below fair value, in our opinion.
This tax-free spinoff is just the latest example of Danaher’s business pruning. Previously, the company distributed shares in the now publicly traded Fortive Corp (industrials) in 2016 and Envista (dental) in 2019 directly to shareholders. We see the Veralto divestiture as merely another step forward on Danaher’s path of focusing on its most attractive businesses, which contributes to its Exemplary Capital Allocation Rating, and we would not be surprised to see Danaher divest more assets in the future.
Operationally, Danaher remains in the midst of a tough period, though, and investors should realize that this divestiture is not the only thing that may constrain Danaher’s growth in 2023-24. In 2023, demand for Danaher’s tools has deflated. This reflects the transition from COVID-19 pandemic conditions to an endemic situation and other more macroeconomic challenges that have arisen in China for example. Specifically, in the near term, we expect revenue and margin headwinds to create a reset year with a moderate profit decline in 2023 and possibly into 2024 while the Veralto divestiture will create tough comparable periods in late 2023 into 2024, too. However, we still see a solid outlook for Danaher’s profits in the longer term, and we think the company can return to more normalized growth patterns after that, including our expectation for high-single digit revenue growth and low-double-digit earnings growth annually in 2025 and beyond.
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