Danaher Corporation’s (NYSE: DHR) stock plunged as much as 16% during regular trading on October 2nd, after completing the spinoff of its Veralto business. DHR shares hit a new 52-week low of $208.96 before closing the day down 2.8% at $213.74. This article analyzes the spinoff, the potential impact on Danaher, and whether DHR stock is a good investment now.
Overview of Danaher and the Veralto Spinoff
Danaher is a large conglomerate that designs, manufactures, and markets professional, medical, industrial and commercial products and services globally. Meanwhile, Veralto focuses specifically on water quality testing and product identification solutions.
On September 30th, Danaher completed the separation of Veralto, exchanging one share of the new company for every three DHR shares held. This resulted in approximately 246 million Veralto shares being distributed to Danaher shareholders. Veralto began trading on the NYSE on October 2nd under the ticker VLTO.
Danaher’s CEO Rainer Blair commented that the successful spinoff enables both companies to better serve their customers and shareholders by focusing on their respective priorities.
Why Did Danaher Spin Off Veralto?
The spinoff aims to transform Danaher into a more focused life sciences company, while allowing Veralto to operate and grow independently. Danaher likely spun off the slower-growth water testing and product ID businesses to highlight the value of its faster-growing biotech and medical divisions.
With Veralto gone, the new Danaher consists solely of its Life Sciences, Diagnostics, and Environmental & Applied Solutions units. These focus on innovative biopharma development, disease research tools, and clinical diagnostic equipment. Many analysts believe this sharpened focus will benefit Danaher long-term.
What Are Analysts Saying About Danaher Stock?
Wall Street analysts are largely bullish on Danaher post-spinoff:
- Paul Knight of KeyBanc trimmed his DHR price target to $300 but kept his Buy rating. He believes the spinoff will unlock greater value for Danaher shareholders by transforming it into a pure-play life sciences firm. His new target still represents 40% upside for the stock.
- Cowen analyst Dan Brennan called the separation a “big win” for Danaher, freeing up the company to concentrate on its higher-growth life science and diagnostics businesses.
- RBC Capital’s Deane Dray said the spinoff provides “strategic clarity” and will strengthen Danaher’s growth profile going forward.
The consensus on TipRanks is a Strong Buy based on 10 Buys and 3 Holds assigned over the past 3 months. The average analyst price target of $280.75 implies 31% upside from current levels.
What Are the Risks for Danaher Stock?
While the outlook is positive overall, some risks remain for Danaher shareholders:
- The spinoff resulted in an immediate 16% stock drop, reflecting the loss of future revenues from Veralto. More selling could occur as the deal is fully digested.
- Danaher trades at a premium valuation of 28x earnings, above its 5-year average P/E of 25x. The stock may be due for a contraction as growth slows post-spinoff.
- Rising interest rates, recession fears, and geopolitical tensions could hamper customer demand across Danaher’s end-markets.
- Integration challenges, unforeseen costs, and distraction risks could accompany such a large spinoff. It may take time to realize the hoped-for benefits.
Is Danaher a Good Stock to Buy Now?
Despite recent weakness, many analysts remain bullish on Danaher long-term. The company is now entirely focused on the lucrative healthcare and life sciences markets, where demand trends remain favorable.
Danaher also has an exceptional track record of value-adding M&A, strong margins, steady cash flow generation, and consistent dividend growth. Once the spinoff dust settles, the more concentrated Danaher could outperform.
For investors comfortable with its above-average valuation and the inherent near-term uncertainty, Danaher appears to be an attractive investment at current levels. The favorable reward-to-risk scenario and its leadership position in critical health technology markets make DHR a compelling stock to buy on weakness.
Danaher took a bold strategic step by spinning off its slower-growth segments to double down on the booming biopharma and medtech markets. The separation could unlock meaningful value for shareholders in the long run. However, the stock may remain volatile until the benefits become clear. Long-term investors could be rewarded for buying Danaher shares around current levels.
Frequently Asked Questions
Q: Why did Danaher spin off Veralto?
A: To become a more focused life sciences company and allow Veralto to grow independently in water quality testing and product identification.
Q: How did the spinoff impact Danaher’s stock price?
A: DHR stock plunged 16% on the day Veralto began trading due to the loss of its future revenue contributions.
Q: Is Danaher a buy after the spinoff?
A: Many analysts remain bullish on the stock long-term due to Danaher’s sharpened focus on fast-growth life science markets. However, uncertainty remains.
Q: What are the biggest risks for Danaher stock?
A: Valuation concerns, slowing growth post-spinoff, recession impact on end markets, and risks that the spinoff benefits fail to materialize.
Q: What is Wall Street’s consensus rating on DHR stock?
A: Strong Buy based on 10 Buy and 3 Hold ratings. The average price target implies 31% upside.
Bernie Grady is a technology and business journalist who writes about trending topics in the world of technology, entertainment, and business. She has a keen eye for spotting new trends and loves to share her insights with her readers. Bernie has been writing professionally for over 10 years and has experience covering a wide range of topics. When she’s not writing, she enjoys spending time with her family and friends.