Morgan Stanley Upgrades Danaher, Says Pall Deal Could Have 'Transformational Impact'

In a report published Tuesday, Morgan Stanley analyst Nigel Coe upgraded the rating on Danaher Corporation (NYSE: DHR) from Equal-Weight to Overweight, while raising the price target from $93 to $100. The analyst believes that the Pall Corporation (NYSE: PLL) deal would have a "transformational impact" on Danaher.

Although the analyst believes that the price being paid for Pall seems difficult to justify through financial metrics alone, the deal is likely to drive double-digit FCF and EPS growth for Danaher through 2020. The deal would also lead to a meaningful improvement in the risk/reward profile of the stock.

"We are comfortable with the strategic fit as well as Danaher's ability to improve PLL's growth profile and achieve the $300m cost savings," Coe stated, adding that Pall's dent was likely to be paid off within three years, "leaving significant scope for additional capital optionality."

Danaher's performance in the last quarter also indicates that the stock is an attractive investment option in the current environment. The company reported 3.5 percent organic growth, along with margin expansion and 123 percent free cash conversion.

According to the Morgan Stanley report, "This underlines DHR's ability to execute in a choppy, low growth environment and this is the world that we will likely be in for the next 2-3 years under our base case scenario."

The analyst expects the company to be able to achieve "superior" earnings preservation despite a mild recession, with the synergies from the Pall Corp. deal offering scope for stable EPS growth. The company is expected to outperform its peers going forward.