Roche and Danaher: Two Plays on Testing

04/09/2020 5:00 am EST


Eddy Elfenbein

Editor, Growth Stock Advisor

I have no doubt we’ll get through COVID-19. We are a resilient, innovative, and adaptable country. But the world is changing. And, with that change comes new challenges and new opportunities, explains Eddy Elfenbein, editor of Growth Stock Advisor.

One of the tools in the fight against infectious diseases that has now become ingrained in our everyday nomenclature is “testing.” Roche Holdings (RHHBY) has been working closely with the FDA to develop faster tests for coronavirus.

In the same way that post-9/11 rules had us all removing our shoes before boarding an airplane, it is not inconceivable that post coronavirus lockdown, we could find ourselves being tested before entering work or paid events. The company that develops the best and fastest test will surely profit greatly.

Not only is Roche developing new tests for COVID-19, but it is also testing some of its already developed drugs, such as one for arthritis, which may be beneficial in the treatment of coronavirus.

Roche revenue increased 9% in full year 2019 versus 2018. The company grew its diagnostic (testing) business 3% and its pharmaceuticals business 11%. If my assumptions are correct, diagnostics may become a much larger driver of revenue going forward.

Danaher (DHR) is one of the strongest companies you’ll run across. For 50 years, it’s been run by the Rales brothers. Their specialty is finding and buying overlooked niche companies with strong cash flow.

It’s a simple formula, and it’s been incredibly successful for them and their shareholders. Over the last 30 years, Danaher has crushed the rest of the market.

In 2016, Danaher bought Cepheid for $4 billion. The FDA just recently announced emergency approval of Cepheid’s Covid-19 test. Instead of being sent off to the lab, Cepheid’s test gives results in just 45 minutes, and the test can be done on-site. This is a huge development.

Now Cepheid has to ramp up production to meet a very high need. What’s interesting is that thanks to Danaher, Cepheid’s manufacturing capabilities have significantly improved. Danaher also owns Integrated DNA Technologies, which can help spread the adoption of the Cepheid test.

Danaher is normally a very sound stock, but with the share price down by 25%, it makes for a good value. Combined with a concrete advancement in the battle against coronavirus, Danaher is an excellent buy here.

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