Danaher Was Just Added To An Important JP Morgan List; Here's Why

In a key development, JP Morgan added Danaher Corporation DHR to its Analyst Focus List. Before delving into what significance the action has for Danaher, a Focus List is a list of stocks recommended by an investment firm, generally consisting of stocks, which the firm believes are the most attractive opportunities at that point in time.

Meanwhile, the firm reiterated its Overweight rating on the shares of the company and its $95 price target.

At the time of writing, Danaher shares were rallying 2.15 percent to $86.93.

Giving the rationale for the company's addition to the Analyst Focus List, analysts Tycho Peterson, Stephen Tusa, Steven Reiman and Tejas Savant said Danaher shares offer an attractive risk/reward against a broader backdrop of historically high tool multiples, given the bottoming out of organic growth in the second quarter, achievable second-half targets and washed out investor sentiment.

Organic Acceleration

The analysts see organic acceleration to 3 percent in the third quarter from 2.3 percent in the second quarter, in line with CEO Tom Joyce's projection on JP Morgan's CEO call earlier this week. The analysts attributed their confidence in the target to easing PLL Industrial comps and Hach Environmental revenues. However, the analysts expect dental revenues to remain muted, as the distributor channel continues to evolve.

JP Morgan believes the mere meeting of third-quarter organic growth expectations is enough for Danaher's stock to re-rate higher, given the stock's underperformance in the year-to-date period and the company's disappointing first-half results.

The firm clarified that investors have positioned themselves for further acceleration in the fourth quarter and into 2018, as CPHD and Phenomenex are added to the organic line. The firm said it expects 3.3 percent growth in the fourth quarter and 3.8 percent growth in 2018.

Abatement In Dental Headwinds

"Longer-term, we view DHR as a steady state 4%+ growth business, with the primary (obvious) near-term obstacle being stabilization in the dental market, but we view this as a matter of when, not if (i.e. we do not view dental as a perpetual no-growth business)," the firm added.

M&A Optionality

As the company delevers, the firm believes its M&A optionality continues to increase, with the company signaling that it is seeking to do another $3 billion to $4 billion, plus, deal.

Best-In-Class Free Cash Flow And Operating Margin

Additionally, the firm noted that Danaher's free cash flow conversion and operating margin potential remain best-in-class, with the operating margin supported by the relative youth of the portfolio. The firm also said the company's recent acquisitions, namely CPHD, PLL, Nobel and Phenomenex, continue to offer meaningful operating margin expansion opportunities.