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Danaher: Hold for Now

March 15, 2012 | About:
Danaher (DHR) has been producing some pretty awesome numbers from its wide mix of businesses. Investment in the conglomerate is like investing across a wide range of industries and geographies in one hit. Danaher may not be as large as competitor General Electric (GE), which has a market capitalization of $200 billion, but its business reach is no less impressive. Through segments that cover medical, industrial, and commercial products, and include electronics, environmental, and life science industries, Danaher sells its products around the world.

At the end of January, Danaher reported record numbers for the fourth quarter and the full year. It also reiterated its 2012 guidance, saying it expects earnings per share to be in the region of $3.20 to $3.35, with an assumed revenue growth of between 2% and 5%.

Danaher is one of those companies that make an effort to control analysts enthusiasm for upcoming results. It surprised on the upside with its earnings in every quarter last year, by between 3% and 7%.

It pays a token dividend of 0.20%, and has done for the last five years. With a pay out ratio of 3%, this dividend will not be under threat, but at a yield of 0.2% neither is it a reason to invest in the shares.

Quarterly revenue growth at Danaher is a very impressive 39.7%. Competitor SPX Corp (SPX) saw its revenues growing by 12.6% in its last quarter, while GE’s revenues fell by 17%.

Its no less a story when looking at margins: Danaher’s operating margin of 17.69% is the best of the three companies (GE’s is 12.09% and SPX’s 7.29%). Management is adept at turning this operating margin into profit margin, also: its profit margin of 13.5% dwarves that of SPX (3.31%) and is some way above GE’s 9.86% profit margin.

Its debt position, too, is far healthier than these rival companies. With a debt/ equity ratio of 31, its operating cash flow of $2.63 billion is more than strong enough to service its debt of £5.31 billion.

On the negative side, its inventories have risen markedly over the last 12 months and now stand at $1.75 billion. With the company expecting revenues to increase in the range of 3% to 5% next year, this build up of inventory could be problematic.

Overall, the management of Danaher is steering the company through difficult times with some aplomb. It has recently been selling small subsidiaries that no longer add to its core business (it has announced the sale of Kollmorgan Electro Optical and Accu-Sort Systems), and concentrating efforts. This strategy has led to good revenue growth, industry beating margins, and better than expected earnings. It manages market expectations with its guidance, and has shown that it beats this guidance by a margin of around 5%. Should similar happen for the full year of 2012, then earnings per share could come in between $3.35 and $3.50 — a comparative over performance to this year.

While the company is well managed, its fortunes could be tied more to the world economy. Danaher’s business was greatly helped last year by inroads to China. However, China expects its rate of economic growth to slow this year. The European Union, another main market for the company, expects recession in the Eurozone countries through 2012.

This year may be the year when Danaher’s quarterly numbers do no more than meet company guidance. Continual beating of expectations build expectations of always doing so. While I like how the company’s management is running the business, the economic weakness in the global economy and key markets will hold Danaher back from exponential growth. At around $53, I recommend holding shares, but would not take any news positions at this time.

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