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Danaher: Spinoff of Veralto Operations Pushes Down Danaher’s Fair Value Estimate Moderately

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Narrow-moat Danaher DHR performed a tax-free spinoff of its environmental and applied solutions group, Veralto, to shareholders. We have reduced our fair value estimate to $243 per share from $265 to reflect this distribution of assets. Danaher’s shares are trading slightly below fair value, in our opinion.

This tax-free spinoff is just the latest example of Danaher’s business pruning. Previously, the company distributed shares in the now publicly traded Fortive Corp (industrials) in 2016 and Envista (dental) in 2019 directly to shareholders. We see the Veralto divestiture as merely another step forward on Danaher’s path of focusing on its most attractive businesses, which contributes to its Exemplary Capital Allocation Rating, and we would not be surprised to see Danaher divest more assets in the future.

Operationally, Danaher remains in the midst of a tough period, though, and investors should realize that this divestiture is not the only thing that may constrain Danaher’s growth in 2023-24. In 2023, demand for Danaher’s tools has deflated. This reflects the transition from COVID-19 pandemic conditions to an endemic situation and other more macroeconomic challenges that have arisen in China for example. Specifically, in the near term, we expect revenue and margin headwinds to create a reset year with a moderate profit decline in 2023 and possibly into 2024 while the Veralto divestiture will create tough comparable periods in late 2023 into 2024, too. However, we still see a solid outlook for Danaher’s profits in the longer term, and we think the company can return to more normalized growth patterns after that, including our expectation for high-single digit revenue growth and low-double-digit earnings growth annually in 2025 and beyond.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Julie Utterback

Senior Equity Analyst
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Julie Utterback is a senior equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. Within the healthcare industry, she covers medical technology and service companies. She is also the chairperson of the equity research team’s capital allocation methodology.

Utterback joined Morningstar in 2005 as an equity analyst in the healthcare industry. At that time, she covered medical technology companies, including orthopedic device, medical equipment, and cardiac device firms. In 2010, she joined Morningstar's credit research team, initiating coverage of the entire healthcare industry and generally helping the organization expand and maintain its credit coverage across many industries. She held that senior credit analyst role until April 2019, when she returned to the equity team to cover medical technology and service companies.

Prior to joining Morningstar, Utterback was an equity analyst at State Farm Insurance for several years. She holds a bachelor's degree in finance from the University of Illinois Urbana-Champaign. She also holds the Chartered Financial Analyst® designation.

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