Heavy Static At Danaher Corporation

Weak results in test & measurement and frustration over a lack of big M&A weighs on the shares

Jul 18, 2014 at 5:45PM

"What we've got here is ... failure to communicate," Cool Hand Luke.

As one of the best-loved conglomerates out there (and seldom a cheap stock as a result), Danaher (NYSE:DHR) operates to a different set of Wall Street expectations than most companies. In the case of second quarter earnings and forward guidance, disappointing results in the volatile test & measurement business not only sent the stock down but will likely renew calls for management to consider breaking up the company. Perhaps adding a bit of irony to that, analysts also continue to express frustration that Danaher isn't making bigger splashes with its M&A efforts.

Danaher is Danaher, and the company will be fine. The diagnostics business is getting stronger and operations like water quality/treatment have strong growth potential in markets like China and India. Though I can't say that the shares have reached a bargain price yet, this may be a name to add to the watchlist in case the disappointment coming out of this quarter leads to a more pronounced skid.

Barely missing the mark in Q2
It seems as though there is a lot more concern about what went wrong for Danaher in the second quarter than what went right. All told, revenue revenue rose 5% as reported (3% on an organic basis) and just barely missed the average estimate and likewise the 5%-plus growth in operating income was just slightly below expectations.

Test & Measurement was the problem child this quarter, with sales down 2% on an organic basis. Dental grew 2% organically, while Environmental and Industrial Tech were both up 3.5% (which Motion seeing its first positive quarter in about two years). Life Sciences and Diagnostics was the leader, with organic growth of 6% on strong performance at Beckman and good results from the IRIS business.

Segment-level profits rose 4%, with Test & Measurement giving a particularly bad showing (down almost 12%) while LSD was up more than 17%. A bit concerning was that only LSD and Industrial Tech showed segment-level margin improvements.

Flunking the test, for now...
The problems in Test & Measurement come down to weak spending by wireless network operators, and Danaher management expects this to continue into 2015. Volatile spending from carriers is nothing particularly new and it underlines part of the reason Agilent is splitting off its test & measurement operations (Keysight) from the life sciences operations. Danaher's news is not particularly positive for EXFO, Teledyne, or Agilent, but Agilent/Keysight at least as the advantage of a more diverse collection of businesses and end market exposures.

Waiting for deals, while getting deals
It has been a while now since Danaher has launched a major acquisition and the analysts who follow Danaher seem to be getting edgy about it. Satisfying sell-side analysts who are jonesing for some activity is a poor reason to do deals, though, and Danaher has echoed a lament that has been expressed by other conglomerates like Dover and Parker Hannifin – namely, that deal valuations have risen significantly and there aren't a lot of attractively priced assets out there right now.

It's also not as though Danaher has just been sitting still. The company has concluded 10 deals for over $1 billion this year. Most recently, the company agreed to acquire Siemens' Microbiology business for $450 million. Danaher paid about 2.25x sales for a business with good margins and one that should represent a good opportunity for synergies with Beckman and the life sciences operations (particularly with an opportunity to follow Bruker and bioMerieux into MALDI-TOF in clinical microbiology).

Should Danaher play to its strengths in health?
Life sciences and diagnostics now represent more than a third of Danaher's revenue and adding in the Dental operations brings the total health/life sciences exposure closer to 50%. Danaher has done a fine job of turning around Beckman and the sales growth has caught up to Abbott Labs. Prolonged weakness at Siemens and Johnson & Johnson (before the sale) didn't hurt Danaher's efforts and with sales growing nicely again there should be more opportunities to boost margins (which are almost 300bp below the company segment average).

The question I have is whether Danaher wants to do more. Danaher management has generally tried to run a balanced operation, so I would frankly expect acquisitions to be anywhere but health and life sciences. Motion and motion control, industrial sensors/controls, and product ID all seem like places where Danaher could expand – perhaps even going so far as to consider acquiring a company like Rockwell Automation. On the other hand, buying more of Siemens' flagging diagnostics operations could be another turnaround opportunity akin to Beckman and a chance to grow a business serving a market with good long-term growth and margins.

The bottom line
I still expect Danaher to generate long-term free cash flow in the mid single or "mid high" single digits and that sort of growth suggests the shares are close to fair value. I'd much prefer to buy Danaher at a price below fair value, but that opportunity comes very rarely. Given the weakness in test & measuremnt and management's commitment to maintaining value discipline, I could see these shares lagging over the next couple of quarters and that could create an interesting long-term opportunity. With that, I'd definitely keep Danaher on a watch list.

A huge long-term opportunity for your portfolio
The best investors consistently reap gigantic profits by recognizing true potential earlier and more accurately than anyone else. Let me cut right to the chase. There is a product in development that will revolutionize not just how we treat a common chronic illness, but potentially the entire health industry. Analysts are already licking their chops at the sales potential. In order to outsmart Wall Street and realize multi-bagger returns you will need The Motley Fool’s new free report on the dream-team responsible for this game-changing blockbuster. CLICK HERE NOW.

Stephen D. Simpson, CFA has no position in any stocks mentioned. 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