3 Reasons DHR is Risky and 1 Stock to Buy Instead

Danaher has had an impressive run over the past six months as its shares have beaten the S&P 500 by 15.6%. The stock now trades at $236.20, marking a 25.6% gain. This performance may have investors wondering how to approach the situation.

Is there a buying opportunity in Danaher, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Is Danaher Not Exciting?

We’re glad investors have benefited from the price increase, but we're cautious about Danaher. Here are three reasons there are better opportunities than DHR and a stock we'd rather own.

1. Core Business Falling Behind as Demand Declines

We can better understand Research Tools & Consumables companies by analyzing their organic revenue. This metric gives visibility into Danaher’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, Danaher’s organic revenue averaged 1.6% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Danaher might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus).

2. Shrinking Adjusted Operating Margin

Adjusted operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies because it excludes non-recurring expenses, interest on debt, and taxes.

Looking at the trend in its profitability, Danaher’s adjusted operating margin decreased by 7.9 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was 28.6%.

3. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, Danaher’s margin dropped by 8 percentage points over the last five years. Continued declines could signal it is in the middle of an investment cycle. Danaher’s free cash flow margin for the trailing 12 months was 20.7%.

Final Judgment

Danaher isn’t a terrible business, but it doesn’t pass our quality test. With its shares topping the market in recent months, the stock trades at 29× forward P/E (or $236.20 per share). This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now. We’d suggest looking at the most dominant software business in the world.

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