Even With A Change At The Top, Danaher Corporation Will Roll On

A change in the CEO, sluggish near-term trends, and a more competitive M&A market isn't likely to lead to big changes.

Apr 17, 2014 at 6:30PM

Multi-industry conglomerate Danaher (NYSE:DHR) definitely buried the lede this quarter, as news of the unexpected retirement of well-liked CEO H. Lawrence Culp next year overshadowed an otherwise "OK ... but not great" quarter. Losing a good CEO is also a risk for a company, but Danaher is a consummate example of a company that reloads instead of rebuilds. These shares are not particularly cheap and they rarely ever are, but an overreaction to this news could perhaps create a window of opportunity.

A decent start to the year
Danaher did basically as expected, but investors often seem to expect a little extra from this company. Revenue rose 5% as reported, with core revenue growth of 3.5%. Results were rather balanced across the businesses. Test & Measurement was the laggard with just 1% core growth, Industrial Tech rose 3%, Environmental and Life Sciences & Diagnostics rose 4%, and Dental rose 6%. Dental and Industrial Tech were the only units to come in higher than expected, with a minor 1% beat for IT and a 3% beat for Dental.

Profitability was just slightly below sell-side targets, but not to a truly meaningful extent. Gross margin improved 30bp from last year. Operating income rose 8% on a 9% increase in segment income, with all units showing growth. Dental led the way with 20% growth, IT and LSD were next at 12% and 10%, while Environmental rose 8% and TM rose 3%. Overall operating margin rose half a point and every unit saw margin expansion.

Diagnostics not fully back up to speed
Danaher has made a lot of progress with its Beckman diagnostics business, but this quarter would suggest that the work isn't over just yet. Danaher couldn't match the high single-digit growth of either Abbott or Roche, even though this looked like a pretty solid quarter for immunoassay and clinical chemistry across the group. Danaher has been gaining share on Siemens (NASDAQOTH:SIEGY), but the company is going to need to improve its automation and molecular diagnostics if it wants to close the gap with Abbott and Roche.

Still waiting on test, while motion remains weak
As investors in Agilent (NYSE:A) know all too well, test & measurement can be an erratic business. Danaher is a little more focused than Agilent and it leads in oscilloscopes and handheld equipment, but push-outs in communications and weakness in government/military weighed on results. Agilent continues to sound bullish about an eventual recovery in communications-related T&M spending, and that should lift demand for Danaher's instruments as well.

I was a little more surprised to see ongoing weakness in Danaher's motion business (part of IT). Automation-related orders at Rockwell, Siemens and other players had been showing some strength (up around 7%), but that doesn't seem to be helping Danaher yet. This business should improve as the year goes on, but in the meantime business like retail petroleum and product ID are doing reasonably well.

A changing of the guard, but probably not the approach
Analysts and investors were definitely surprised to learn of CEO Culp's plan to retire next year, with EVP Thomas Joyce taking the position. Culp has done a fine job as CEO of Danaher and while this looks like an unusually young age to retire (he'll be 52 at the time), he will have been in the job for around 14 years. As Danaher is often lauded for its bench strength, there are good reasons to expect a lot from Mr. Joyce in the years to follow.

It seems safe to count on this move driving speculation about Danaher's ongoing business plan. Some analysts have advocated a major change in the company's approach, breaking up into smaller businesses and eschewing the conglomerate approach. I doubt that will happen. Danaher may have missed out on some M&A opportunities (Life Technologies, JNJ's diagnostics business, and Ashland's water tech business), but an unwillingness to overpay for assets does not argue for a radical strategic shift.

With $8 billion in financial resources, Danaher can still make some M&A moves, though a big move during this CEO transition period may be less likely. I would like to see Danaher add to its diagnostics business (particularly MDx), but a larger move in life sciences like Agilent (after it spins off the test and measurement business) or a bigger deal in industrial automation could make sense.

The bottom line
Danaher's business does not change much from quarter to quarter and neither does my valuation. I'm still looking for long-term revenue growth around 5% and FCF growth around 6%, and the shares do appear priced for only a mid-single digit return at this price. I'd be very reluctant to sell Danaher if I held the shares, but there are cheaper names to choose from today in my opinion.

The greatest thing Warren Buffett ever said
Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

Stephen D. Simpson, CFA owns shares of Roche. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers