Although the S&P 500 is down 2.8% over the past six months, Danaher’s stock price has fallen further to $190.75, losing shareholders 9.3% of their capital. This might have investors contemplating their next move.
Is there a buying opportunity in Danaher, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Danaher Not Exciting?
Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons we avoid DHR and a stock we'd rather own.
1. Core Business Falling Behind as Demand Plateaus
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 failed to grow its organic revenue. 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 accelerate growth, 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 one of the best measures of profitability because it tells us how much money a company takes home after subtracting all core expenses, like marketing and R&D. It also removes various one-time costs to paint a better picture of normalized profits.
Analyzing the trend in its profitability, Danaher’s adjusted operating margin decreased by 10.4 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 28.2%.
3. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Danaher’s margin dropped by 7.1 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 21.4%.
Final Judgment
Danaher isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 22.6× forward P/E (or $190.75 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're pretty confident there are superior stocks to buy right now. Let us point you toward one of our top digital advertising picks.
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