Danaher’s decision to spin off its water business is a win-win for long-term investors
Danaher ‘s (DHR) announcement this week that it will spin off its growing water business is a big win for shareholders — including us at the Club. The medical diagnostics and health technology company has a great track record for creating shareholder value through both organic investments and strategic mergers and divestitures. This is another smart move. Danaher (DHR) will separate its Environmental & Applied Solutions, or EAS, business segment as a separately traded public company. EAS provides instruments and software to businesses and utilities to test water quality. The spin-off allows the two businesses to increase focus on their respective end markets. It also frees up capital at Danaher for additional growth investments (organic or via M & A) while allowing both companies to trade on pure-play multiples. Danaher can focus more on science and technology, while the newly formed company can better tap into the fast-growing need for clean water. Fifty-five percent of EAS revenue is recurring. The separation is expected to be tax-free to current shareholders and finalize in the fourth quarter of 2023. Since the announcement Wednesday, shares of Danaher were up 2% in a down market. “I do think this [DHR] should be up more on this news,” said Jeff Marks, director of portfolio analysis at the Investing Club, during the “Monthly Meeting.” “This is just textbook Danaher. The company has a rich history of spinning high-quality assets that are more cyclical compared to their core life science, biopharma business.” Danaher in 2016 spun out industrial conglomerate Fortive (FTV), which at the time consisted of Danaher’s Test & Management segment. In 2019, it spun out Envista (NVST), which had consisted of Danaher’s dental segment. In both cases, after an initial growth hit due to the divestitures, we saw a notable sales growth acceleration once these slower growth business were on their own. For example, sales growth averaged about 4.1% from 2013 to 2015, dipped in 2016 due to the separation and then accelerated to about 8.5% in 2017 and 2018 before the Envista spin-off. Then following that spin-related decline in 2019, sales again accelerated to 24.4% in 2020 and 32.2% in 2021; some of that was likely also due to the benefit off pandemic related testing revenue. “I think there’s going to be a lot of appeal for this new business,” added Marks. “It is high quality. It is an industry leader in what it does. That’s really why I think this transaction, it’s going to be a win-win for shareholders. Shedding a slower-growing asset, a lower-margin asset, that should allow for Danaher’s price to earnings multiple to expand.” More good news: Danaher’s management team said 2022 core revenue growth is expected to be above the prior guidance range thanks higher-than-anticipated respiratory testing revenue at Cepheid. It’s now expected to exceed $500 million in the third quarter, up from the roughly $325 million management assumed in its prior guidance. Base business core revenue growth is still expected to be up in the high-single-digit range. Bottom line This spin-off is welcome news for long-term investors and a move that enhances the company’s sales and earnings profile in the long run. Indeed, in the company’s investor slide presentation , management said they think that in 2024 and beyond, the Life Sciences and Diagnostics businesses can both grow core revenue at high-single-digit rate. Whereas, they think EAS has a longer-term core revenue growth profile in the mid-single-digit range. The remaining company is also expected to generate about 80% recurring revenue (think consumables that requirement constant replacement), lower revenue volatility, free cash flow in excess of net income and double-digit earnings growth. If not for the weakness we are seeing in the broader market, we would expect shares to be up more on the news. (Jim Cramer’s Charitable Trust is long DHR. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
