5 Things Danaher Corp.'s Management Wants You to Know

Key takeaway's from Danaher's recent results.

Aug 25, 2014 at 8:05AM

Investors in Danaher (NYSE:DHR) saw the company deliver a disappointing set of second-quarter results that caused the stock to drop notably. In fact, as of today, it's pretty much flat on a six-month basis. In truth, the results weren't that bad: The midpoint of full-year generally accepted accounting principles earnings per share guidance was actually raised by a couple cents as management narrowed its guidance to $3.67-$3.72 from $3.60-$3.75.

However, the market obviously expected more, and certain elements of the company's performance surprised on the downside. Danaher reports out of five segments: industrial technologies, environmental (mainly water quality), dental, life sciences and diagnostics, and test and measurement. This kind of diversification normally means that the company is broadly exposed to the industrial economy, and management's commentary certainly reflected a moderately growing environment. With that said, here are five things management wants you to know about the quarter.

Weakness limited to two areas, profits and margins hit

First, Danaher's management was keen to point out that the weakness was limited to two specific areas. Communications revenue within its test and measurement segment was down at a "low double-digit" rate, which the company linked to delays in spending by wireless carriers. Indeed, rival Agilent (NYSE:A) also reported a 6% fall in its communications revenue. The other difficult area came in the dental segment, which recorded "weak consumable sales," possibly due to bad weather earlier in the year. Unfortunately, according to Danaher CEO Larry Culp, both products tend to be "high-margin variables", and their underperformance hit operating profits within the test and measurement and dental segments.

Source: Danaher Presentations

Second, the impact of these two weak products hurt margins, but elsewhere Danaher achieved good growth in core margins. The following chart illustrates how segmental operating profit margins (measured in basis points, with 100 points equal to 1%) grew handsomely in three of five segments.

Source: Danaher Presentations.

Good cash flow trends, bullish on acquisitions

Danaher has long been noted for its strong cash generation, which is often uses to make earnings-enhancing acquisitions -- a good example being the $6.8 billion acquisition of Beckman Coulter in 2011.

Management would like investors to know two things in this regard. First, while free cash flow was flat compared to the first six months of last year, the quarterly trend is upward. Per CFO Dan Comas on the earnings conference call: "[I]t's trending well and generated almost $850 million of cash in the quarter versus less than $400 million in the first quarter. I expect that positive trend to continue."

In fact, Danaher generated $2.97 billion in free cash flow in the last four quarters, representing nearly 5.7% of its enterprise value. A company's enterprise value (market cap plus debt) equates to what a potential acquirer would actually pay for the company, and free-cash flow is de-facto the return on their investment. A yield of 5.7% is attractive, as it it's significantly above the interest rate that an acquirer could get on its money. .

Second, Culp was keen to outline an intent to pursue acquisitions: "[W]e remain confident in our ability to deploy our more than $8 billion of M&A capacity." So, even though its forecast for core revenue growth is only 2%-4% for the full year, investors can expect management to use its strong cash flow generation to make earnings-enhancing acquisitions. In other words, growth could receive a boost in the future thanks to the company's strong cash flow generation. 

Cautious guidance

The final takeaway from management's commentary is a certain sense of caution. Core revenue grew at 3% in the second quarter, following a 3.5% increase in the previous quarter, but management maintained the 2%-4% full-year target. Moreover, the weakness in the communications branch of the test and measurement segment is expected to continue. Culp's commentary on the issue: " [O]ur network monitoring business was adversely affected by delays in wireless carrier spending, which we now believe will also result in negative growth for the platform for the rest of the year."

Furthermore, management described the overall growth environment as being "modest," with Western Europe growth coming in slightly below expectations in the second quarter. Looking ahead, the third-quarter guidance is for "core growth to be comparable with the growth rate in the first half." In a nutshell, Danaher's CEO is not telling you to expect great things in the coming quarters.

The takeaway

There were a couple weak spots in the earnings report. Dental consumables sales might well come back in future quarters, but communications looks likely to remain weak throughout the year. If you can forgive these two issues, then you could argue that Danaher's management is doing a pretty good job of increasing core margins across its segments while it waits for a better growth environment.

In addition, the guidance is cautious -- possibly creating some possibility for upside surprise --  and management has the free cash flow and will to make growth-enhancing acquisitions in the future. Given its acquisition history, you shouldn't be surprised if it does so.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Lee Samaha 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

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.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

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. It's also featured on several dozen 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 ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers