RBC says Danaher is the right kind of stock for this market — here's why we agree

Published Wed, Jun 1 20222:41 PM EDTUpdated Wed, Jun 1 20222:56 PM EDT

Kevin Stankiewicz @in/kevinstankiewicz @kevin_stank

In recent weeks, we've worked on high-grading our portfolio to navigate this uncertain market: trim some losers — or exit a position entirely — and put that money to work in better companies that are on sale. Danaher (DHR) is the kind of stock that fits the high-grading bill. Remember: We want to own shares of companies that do things and make stuff for a profit and can return excess cash to shareholders via dividends and buybacks. It means focusing on companies with pricing power as their stock prices go lower. Club holding Danaher is worth putting on your radar and possibly buying around its current levels if you don't own the life-sciences firm already. RBC Capital Markets happens to agree with us. In a note to clients Wednesday, analysts led by Deane Dray upgraded Danaher to outperform and raised their price target to $310, up from $299. That's about 17.5% upside from where the stock closed Tuesday. Danaher was down about 1% Wednesday afternoon, trading around $261 per share. RBC's buy call By upgrading Danaher, RBC analysts essentially said Danaher is the right stock for this moment. "We are upgrading Danaher from Sector Perform to Outperform as we believe that its high-quality, defensive portfolio looks incrementally more attractive given the higher Wall of Worry/macro fears. This upgrade is also consistent with our sector call to increase defensive exposures." We've emphasized the need for a defensive positioning since early April and taken steps to do just that, such as adding Procter & Gamble (PG) to our portfolio. Danaher also is defensive. It makes equipment for things like diagnostic tests, while its environmental division has businesses dedicated to water quality and product packaging. Its largest revenue source is its life-sciences division, which includes biotech companies such as Moderna (MRNA) supplier Aldevron. Danaher's life-sciences unit also includes a firm called Integrated DNA Technologies, which makes nucleic acid products that are used in pharmaceutical development. RBC analysts point to a number of reasons why they consider Danaher to be such a high-quality company. That includes its margins and its 30 consecutive years of having a free cash flow conversion rate exceeding 100%. The latter metric illustrates the quality of Danaher's earnings. The analysts also like the makeup of Danaher's revenues, noting that about 75% of its sales come on a recurring basis thanks to things like critical consumables that customers need to replenish. There's a lot of concern on Wall Street about an economic slowdown, but the RBC analysts believe history shows Danaher should be able hold up well. We agree with that view. "If you think the economy is going to slow down, this is the one to buy," Jim Cramer said during Wednesday's "Morning Meeting." What else the Club likes We have little doubt about Danaher's caliber as a company for the reasons RBC noted above, but investors must always consider valuation before buying a stock. We think Danaher is trading at attractive levels — about 25 times forward earnings estimates. That's below its five-year average of 26.5, according to FactSet. Another thing worth considering with Danaher is additional acquisitions. The company has a strong track record in this area, completing a deal for GE Life Sciences a little more than two years ago and for Aldevron, the aforementioned Moderna supplier, last year. A lot of companies have seen their valuations come down this year, and Danaher has firepower available if management sees a quality target on sale. We're not saying anything is imminent, but it's something we're keeping an eye on with Danaher. (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.

In this photo illustration, Danaher Corporation logo seen displayed on a smartphone with the stock market information of Danaher Corporation in the background.

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