Stock of the Week: A Life Sciences Innovator Goes Under the Microscope
Alpesh Patel|May 26, 2023
In a shaky economic environment that’s looking a little, well, ill…
A globally diversified company is just what the doctor ordered.
And this week’s Stock of the Week is a prescription for success.
This life sciences and technology innovator is growing earnings by a big 27% per year… and has solid margins of 22%.
The stock has low volatility… and good momentum. I see the potential for 40% returns in the next year.
Get all the details on the company – including the ticker – in this week’s video.
Click on the image below to watch it.
Hi, Manward family, and welcome to another Stock of the Week. I am CEO of an asset management company, which has a hedge fund within it, and a private equity fund. My name is Alpesh Patel.
Let’s have a look at this week’s Stock of the Week. Now, as you know, my team provides me a list of companies. They give me the data, and then I pick one which is interesting. And I was so tempted this week to pick an AI-related tech stock. I will do so in the future, but I just thought I wanted to take a break from it. You might want to take a break from it. So I didn’t go with an IBM or a Nvidia or an Adobe even.
So let’s see what I did go with.
I went with Danaher (DHR), one which you will all doubtless know. It’s globally diversified. It’s a conglomerate. It was founded in 1984.
The company designs, manufacturers and markets medical, industrial, and commercial products and services.
So what does the company do? Well, it operates in these segments: biotech, life sciences – and I guess AI’s coming into all of those – diagnostics, and environmental and applied solutions as well.
What else can I tell you about it which struck my interest? Well, actually, it’s the financials, but I’ll just give you a bit more background on the narrative.
It’s obviously in science and technology, as you can tell from what I’ve explained. It’s been growing earnings at an average annual rate of 26.9%. That’s big. That’s pretty huge. Now, whilst it’s huge, it’s also in line with the life sciences industry, so not that huge.
So we’re going to have to look at the share price to see if it’s been rising by the same amount or more than that, then it’s probably going to pull back if more than that. If it’s been underachieving, then it’ll probably revert back up to where it should be.
Revenue’s been growing at an average rate of nearly 15%, and its return on equity figures are 13.5%, which is pretty good. Net margins of 22%. So these are big, big, big good numbers – lots of safety there as well.
Well, let’s look at some of those financials, shall we. My Growth-Value-Income rating – which looks at the valuation of a company, revenue growth and dividend yields – that’s at a 7.
CROCI – cash return on capital invested – was invented by Deutsche Bank as a way of predicting stock price moves and then used by Goldman Sachs Wealth Management. If you want to know why that’s important, click here.
The CROCI is at 9.7%, so it’s not above the 10%-ish mark that I’d like to see, but it’s still good, right up there.
The Sortino is above my threshold that I want it at. It’s a measure of risk versus reward, or average performance. That’s at a 0.4. So not bad, not bad.
Volatility is below 20%, which is what I like to see, so that’s good as well… and it’s been outperforming the market.
So where does that leave us?
Well, turnover is going in the right direction. Profits are going in the right direction. Pretax profits are going in the right direction as well.
The forecast P/E, or the current share price to forecast profits, is at a multiple of 24, which is a little bit expensive, but not really for a tech life sciences type of company, or if you put it into business support services, not for a support services, tech-heavy company. So not bad as a valuation.
Now, growth has been forecast in the immediate future to dip a little bit, as well as earnings before interest and tax.
That doesn’t worry me too much given the overall trend and the direction the company’s been going in, so I’m not too worried about that.
Let’s just have a look at the share price.
Well, given the monthly MACD, a really good predictor of momentum, I think this one has possibly a little bit further to go – lower, lower before it starts going up. But I think when it starts rising, it’ll be a 40% move to the upside within a year. That is what I’d be targeting and looking at.
I looked at some of the banks, and a whole load of them think it’s a buy as well on a separate basis.
But again, the valuation issue on a discounted cash flow basis… It’s probably fairly valued just in terms of how share price moves.
Despite its low volatility figure, there is some risk. It could after 250 days be in negative territory, and you might say, “Well there‘s always that risk, but yes, and this has that risk as well.”
So be careful on that front.
So overall, yeah, I think we’ve managed to pick a non-AI company which might benefit from the AI revolution.
Thank you all for listening. Hope you found that informative and a little bit entertaining as well… and you’re not all getting too starved of AI stocks.
Don’t worry. Normal service will resume, and I’ll come back with more of those as well.