⁠Dimitry Nakhla | Babylon Capital®
6 months ago I suggested $DHR was trading for a substantial premium at $240💵 & that I’d be more interested closer to $200💵

After its Q4 earnings report, $DHR shares are down ~6% & down over the past 6 months
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As I stated in the analysis (post shared below):

“As you can see, $DHR needs to trade above 32x to have attractive return potential

While possible, I wouldn’t want to rely on that assumption as it doesn’t leave us with any margin of safety

While the 10-year mean multiple is 25.18x, I’d be content relying on somewhere closer to 27x - 28x earnings given $DHR quality, culture, competitive advantage, earnings growth rate & the quality of earnings, & long-term tailwinds in the sector

Yet, even at 27x - 28x earnings, the return potential outlook is bleak

Today at $240💵 $DHR is trading at a substantial premium

I’d become interested in $DHR closer to $200💵 or at ~25.50x NTM earnings (roughly 16.7% below today’s price)”

A sober valuation analysis on $DHR 🧘🏽‍♂️

•NTM P/E Ratio: 30.69x
•10-Year Mean: 25.18x

•NTM FCF Yield: 4.34%
•10-Year Mean: 3.24%

As you can see, $DHR appears to be trading above fair value

Going forward, investors can receive ~18% LESS in earnings per share & ~25% LESS in FCF per share 🧠***

Before we get into valuation, let’s take a look at why $DHR is a quality business

BALANCE SHEET✅
•Cash & Short-Term Inv: $7.03B
•Long-Term Debt: $16.42B

$DHR has a great balance sheet, an A- S&P Credit Rating, & 22x FFO Interest Coverage

RETURN ON CAPITAL🆗*
•2019: 6.2%
•2020: 7.8%
•2021: 10.3%
•2022: 10.7%
•2023: 7.4%
•LTM: 7.2%

*ROIC relatively low partly due to $DHR growth strategy (acquisitions, capital allocation, etc)

RETURN ON EQUITY🆗
•2019: 8.3%
•2020: 10.8%
•2021: 12.8%
•2022: 13.3%
•2023: 8.2%
•LTM: 7.8%

$DHR has decent return metrics, highlighting the financial efficiency of the business

REVENUES✅
•2018: $17.05B
•2023: $23.89B
•CAGR: 6.97%

FREE CASH FLOW✅
•2018: $3.44B
•2023: $5.78B
•CAGR: 10.93%

NORMALIZED EPS✅
•2018: $7.58
•2023: $4.52
•CAGR: 10.89%

SHARE BUYBACKS❌
•2018 Shares Outstanding: 0.70B
•LTM Shares Outstanding: 0.74B

MARGINS✅
•LTM Gross Margins: 58.9%
•LTM Operating Margins: 21.9%
•LTM Net Income Margins: 17.1%

***NOW TO VALUATION 🧠

As stated above, investors can expect to receive ~18% LESS in EPS & ~25% LESS in FCF per share

Using Benjamin Graham’s 2G rule of thumb, $DHR has to grow earnings at a 15.35% CAGR over the next several years to justify its valuation

Today, analysts anticipate 2024 - 2026 EPS growth over the next few years to be less than the (15.35%) required growth rate:

2024E: $7.62 (0.5% YoY) *FY Dec
2025E: $8.74 (14.8% YoY)
2026E: $9.71 (11.0% YoY)

$DHR has a decent track record of meeting analyst estimates ~2 years out, so let’s assume $DHR ends 2026 with $9.71 in EPS & see its CAGR potential assuming different multiples

32x P/E: $310.72💵 … ~11.3% CAGR

28x P/E: $271.88💵 … ~5.5% CAGR

27x P/E: $262.16💵 … ~4.0% CAGR

26x P/E: $252.46💵 … ~2.5% CAGR

25x P/E: $242.75💵 … ~1.0% CAGR

As you can see, $DHR needs to trade above 32x to have attractive return potential

While possible, I wouldn’t want to rely on that assumption as it doesn’t leave us with any margin of safety

While the 10-year mean multiple is 25.18x, I’d be content relying on somewhere closer to 27x - 28x earnings given $DHR quality, culture, competitive advantage, earnings growth rate & the quality of earnings, & long-term tailwinds in the sector

Yet, even at 27x - 28x earnings, the return potential outlook is bleak

Today at $240💵 $DHR is trading at a substantial premium

I’d become interested in $DHR closer to $200💵 or at ~25.50x NTM earnings (roughly 16.7% below tod[...]

ay’s price)

At that price, I can reasonably expect ~12% CAGR while assuming 27x & ~10.2% CAGR while assuming 26x, a multiple I view as fair for $DHR

#stocks #investing
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𝐃𝐈𝐒𝐂𝐋𝐎𝐒𝐔𝐑𝐄‼️: 𝐓𝐡𝐢𝐬 𝐢𝐬 𝐍𝐎𝐓 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐀𝐝𝐯𝐢𝐜𝐞. 𝐁𝐚𝐛𝐲𝐥𝐨𝐧 𝐂𝐚𝐩𝐢𝐭𝐚𝐥® 𝐚𝐧𝐝 𝐢𝐭𝐬 𝐫𝐞𝐩𝐫𝐞𝐬𝐞𝐧𝐭𝐚𝐭𝐢𝐯𝐞𝐬 𝐦𝐚𝐲 𝐡𝐚𝐯𝐞 𝐩𝐨𝐬𝐢𝐭𝐢𝐨𝐧𝐬 𝐢𝐧 𝐭𝐡𝐞 𝐬𝐞𝐜𝐮𝐫𝐢𝐭𝐢𝐞𝐬 𝐝𝐢𝐬𝐜𝐮𝐬𝐬𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭.

𝐓𝐡𝐞 𝐢𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧 𝐜𝐨𝐧𝐭𝐚𝐢𝐧𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭 𝐢𝐬 𝐢𝐧𝐭𝐞𝐧𝐝𝐞𝐝 𝐟𝐨𝐫 𝐢𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧𝐚𝐥 𝐩𝐮𝐫𝐩𝐨𝐬𝐞𝐬 𝐨𝐧𝐥𝐲 𝐚𝐧𝐝 𝐬𝐡𝐨𝐮𝐥𝐝 𝐧𝐨𝐭 𝐛𝐞 𝐜𝐨𝐧𝐬𝐭𝐫𝐮𝐞𝐝 𝐚𝐬 𝐢𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐚𝐝𝐯𝐢𝐜𝐞 𝐭𝐨 𝐦𝐞𝐞𝐭 𝐭𝐡𝐞 𝐬𝐩𝐞𝐜𝐢𝐟𝐢𝐜 𝐧𝐞𝐞𝐝𝐬 𝐨𝐟 𝐚𝐧𝐲 𝐢𝐧𝐝𝐢𝐯𝐢𝐝𝐮𝐚𝐥 𝐨𝐫 𝐬𝐢𝐭𝐮𝐚𝐭𝐢𝐨𝐧. 𝐏𝐚𝐬𝐭 𝐩𝐞𝐫𝐟𝐨𝐫𝐦𝐚𝐧𝐜𝐞 𝐢𝐬 𝐧𝐨 𝐠𝐮𝐚𝐫𝐚𝐧𝐭𝐞𝐞 𝐨𝐟 𝐟𝐮𝐭𝐮𝐫𝐞 𝐫𝐞𝐬𝐮𝐥𝐭𝐬.

𝐈𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧 𝐜𝐨𝐧𝐭𝐚𝐢𝐧𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭 𝐡𝐚𝐬 𝐛𝐞𝐞𝐧 𝐨𝐛𝐭𝐚𝐢𝐧𝐞𝐝 𝐟𝐫𝐨𝐦 𝐬𝐨𝐮𝐫𝐜𝐞𝐬 𝐛𝐞𝐥𝐢𝐞𝐯𝐞𝐝 𝐭𝐨 𝐛𝐞 𝐫𝐞𝐥𝐢𝐚𝐛𝐥𝐞, 𝐛𝐮𝐭 𝐢𝐬 𝐧𝐨𝐭 𝐠𝐮𝐚𝐫𝐚𝐧𝐭𝐞𝐞𝐝. - Dimitry Nakhla | Babylon Capital® tweet

⁠Dimitry Nakhla | Babylon Capital®
RT @DimitryNakhla: @investsavuri I prefer $DHR over $TMO (in general), yet given today’s valuations relative to growth I prefer $TMO
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⁠Dimitry Nakhla | Babylon Capital®
On 11/15/24 I stated that $TMO is more attractive than $DHR given their respective valuations at that time 💵

Since then?

$TMO +12.30% 📈
$DHR +0.26% 🟰 https://t.co/DfPKQQbuEQ

@investsavuri I prefer $DHR over $TMO (in general), yet given today’s valuations relative to growth I prefer $TMO - Dimitry Nakhla | Babylon Capital®
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