Mar Vista – Danaher: Headwinds Are Primarily Cyclical, Growth To Regain Momentum

Summary:

• Mar Vista initiated an investment in Danaher due to durable competitive advantages, compounding intrinsic value, and superior capital allocation strategy.
• Danaher’s strong barriers to entry in biotechnology and life sciences, along with its focus on innovation and capital efficiency, have consistently increased shareholder value.
• Anticipated secular growth trends in biologics and genomics, along with Danaher’s capital allocation strategy, are expected to drive intrinsic value growth despite recent challenges.

The following segment was excerpted from this fund letter.

Danaher (NYSE:DHR)

During the quarter, we initiated an investment in Danaher (DHR).

Danaher has long checked three of Mar Vista’s qualitative boxes for investment: durable competitive advantages, above average compounding of intrinsic value, and a superior capital allocation strategy. Recently, after material underperformance over the last two years, the fourth criterion was met: stock trades at a discount to our estimate of fair value.

This global leader in biotechnology, life sciences, and diagnostics has established strong barriers to entry for each of its businesses. These include a loyal customer base, recurring revenues, and proprietary technology protected by patents and copyrights.

Once Danaher’s tools are selected for the clinical trial process of a new drug, they tend to remain in use throughout a successful drug’s lifecycle. Moreover, Danaher’s well-defined culture, rooted in the Danaher Business System (“DBS”), provides lasting advantages through a focus on continuous innovation, margin expansion, efficient marketing practices, and capital efficiency, all of which have consistently increased shareholder value across a diverse range of businesses.

We anticipate several secular growth trends that should drive high-single-digit revenue and double-digit free cash flow growth over time. While the bioprocessing industry is currently undergoing a temporary adjustment following the COVID-era boom, a secular shift towards biologics and genomics in medicine is expected to significantly expand Danaher’s market opportunities. The continued innovation and adoption of molecular diagnostics, the demand for faster and more accurate test results, and a growing installed customer base should fuel strong demand for Danaher’s diagnostic products.

Danaher’s well-defined capital allocation strategy is poised to further accelerate intrinsic value growth. The company has a proven history of acquiring assets, optimizing their returns on capital through the DBS process, and often divesting these assets to benefit shareholders. The spinoff of Veralto, Danaher’s water quality and product quality/innovation division, has reshaped the company’s revenue mix. Biopharmaceutical manufacturing tools account for almost one-third of revenues post-spinoff.

Challenges such as excess inventory from the COVID-era boom, reduced biotech funding, delays in gene and cell- based therapies, and softer demand from China have all pressured Danaher’s fundamentals and stock price since late 2021. However, we view these headwinds as primarily cyclical rather than secular, and we anticipate growth to regain momentum in the coming year. Given the stock’s modest discount to estimated fair value, we established a new position in our portfolio.