A Great Deal Between Danaher and Pall Corporation

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Jul 10, 2015

In this article let´s take a look at Pall Corporation (PLL, Financial), which manufactures and markets filtration, separation and purification products; and integrated systems solutions worldwide and try to prove to investors why it is a solid investment over the next years.

Steven Cohen (Trades, Portfolio) is one of the largest investors in Pall with 121,709 shares valued at $12.22 billion, according to the fund's latest filing. During the first quarter, the guru has more than doubled his position; he upped his stake by 144%.

Strong potential

On May, Danaher (DHR, Financial) announced an agreement with Pall to acquire all shares for $127.20 per share (a 28% premium) by the end of calendar 2015. But the past days, the $13.8 billion acquisition took place and is the largest buy in the sector that has occurred this year. The transaction is $3bn in cash and $5bn in commercial paper, and the rest will be finance with a long-term loan. Danaher has acquired more than 16 companies in the last five years.

Pall is going to benefit from a world that places greater emphasis on potable water, creating value-added components in industrial filtration systems, while reducing operating costs and also lowering diseases while patients are in the hospital.

The firm has focused on customer´s needs, designing systems for specific needs. This obviously has a cost that reduces margins but in the long run, the company will benefit from a steady revenue stream.

Pall has made 4 acquisitions the past year. First, it acquired Medistad Holding BV, a European manufacturing company and SoloHill Engineering, a U.S. tech company. In the third quarter, Pall acquired the life sciences business of ATMI Inc. and in the fourth quarter, it bought Filter Specialists Inc., a U.S. based supplier of filtration products.

When looking at operating costs they were reduced and gross margins have exceeded 50%, while operating margins is ranked higher than 90% of the 1662 Companies in the Global Diversified Industrials industry.

Quarter Ended Jan13 Apr13 Jul-13 Oct-13 Jan14 Apr14 Jul-14 Oct-14 Jan15 Apr15
Operating Marging (%) 16.99 15.45 16.15 15.62 16.81 15.95 18.49 17.91 16.80 17.55

Further, the firm showed improvement in Life Science, reaching more than 10% growth in the BioPharm Division.

Relative valuation

In terms of valuation, the company sells at a trailing P/E of 35.23x, trading at a premium compared to the industry median. The P/B Ratio is close to 10-year high of 8.17 and the the P/S Ratio is close to 10-year high of 4.8. These metrics indicate the stock is overvalued.

Final comment

As outlined in this article, the deal will combine Danaher 's strengths in life sciences with Pall's businesses.

Although I would recommend investors to consider adding the stock for their long-term portfolios, I think we should wait some time, because the stock is trading at a 52-week high, and I believe it is a bit expensive. Manning & Napier Advisors, Inc, sold out the stock in the second quarter of 2015.

Looking at Danaher, the company is undergoing a profound change, a transformation. Nowadays, it is a more pure-play life science company, and we expect for the future a high exposure to biological production.

Disclosure: Omar Venerio holds no position in any stocks mentioned.