There is no shortage of stock ideas for investors in what can loosely be called the diversified industrial sector. But not all conglomerates were made equally. For example, in the case of Danaher (DHR -0.36%), it's very hard to find a direct comparison. Instead, the company competes across a number of sectors with smaller companies like DENTSPLY, Ametek, Sigma-Aldrich Corporation, Agilent Technologies (A 0.22%), and Waters Corporation. The stock is one of the most attractive of the industrial conglomerates and here is why.
3 reasons why Danaher stands out
First, the company has a well-deserved reputation for acquiring smaller businesses and then extracting every last piece of profitability it can out of them. It's been highly rewarding for shareholders (the stock is up threefold in the last 10 years), and it's also left them holding a company containing some pretty diversified businesses. In other words, Danaher has the kind of diversification that can generate growth through the business cycle.
Source: Danaher Corp Presentations
Second, perceptive readers will note that Danaher operates within a few industries that are not usually seen as being cyclical. Again, good diversification. Moreover, in contrast to much of the industrial sector, it's been performing better recently within its high-growth segment, which is usually a euphemism for emerging markets. For example, quoting from Danaher's recent conference call:
From a geographic perspective, high-growth markets improved notably from the third quarter and grew at a high-single-digit rate. In China, sales increased high-single digits, with continued strength in Dental, Water Quality, Life Sciences & Diagnostics. High-growth markets now represent more than 25% or approximately $5 billion of our annual revenue, up from $2.7 billion just 3 years ago.
This point hits home when you consider that Agilent Technologies disappointed the market in February with its guidance. Agilent reported a "solid start" to its life sciences, diagnostics and applied markets sales, but its electronic measurement (42% of first quarter revenue) disappointed with weakness in aerospace/defense.
Third, Danaher Corp's operational performance continues to be excellent. For example, its free cash flow to net income conversion ratio stood at 113% for the full year. In addition, while free cash flow came in at $3 billion (around 5.7% of its enterprise value), it would have come in $100 million more without paying taxes on the sale of a joint venture and some stock in another company.
Danaher set for a good 2014
Internal guidance is for 2%-4% core revenue growth in 2014, with EPS forecast to be $3.60-$3.75; implying an increase in earnings of 5.3%-9.6% in 2014. Moreover, many of its segments have some upside opportunities in 2014.
For example, despite the doom and gloom about emerging markets in 2014, countries like China are under pressure to improve environmental standards and water quality. Good news for Danaher's environmental segment.
Investing Fools already know Pall Corp gave results recently and reported good growth in life science consumables sales, an indication that life-science spending is picking up. Moreover, Danaher managed to increase its life science and diagnostics segment operating margins in 2014 by 250 basis points to 16.7%. It made notable progress by turning around performance at Beckman Coulter, an acquisition made in 2011.
Elsewhere, the industrial-technologies segment achieved its first positive quarter of the year in the fourth quarter, and management guided toward a 1%-3% increase in revenue for 2014. Furthermore, steps are being take to exit some lower-margin business within the segment.
Turning to the dental segment, operating profit only grew 4% in 2013, partly due to the negative impact on margins created by relatively better sales for its technology products versus higher-margin consumables. The issue of weak consumables sales has plagued the dental industry for a while, and the severe winter weather is believed to have held back consumables sales growth at dental distributor Patterson Companies (PDCO 2.16%). But Patterson Companies saw a stronger quarter with its basic equipment sales. Patterson Companies' management also implied -- despite a weather affected quarter for consumables -- the dental market would return to historic growth levels and take consumables sales higher in due course.
The bottom line
All told, Danaher Corp is a well-run company and, based on its cash-flow generation and track record of delivery, it trades on a reasonable valuation. It's the sort of stock that looks likely to reward long-term investors, and given the upside potential in some of its businesses in 2014, the stock has a place in a balanced investor's portfolio.
