Danaher Corporation (NYSE:DHR) has comfortably outperformed the S&P 500 in the last year, but the question is: Can its run continue? Part of the answer lies in management's ability to successfully integrate Pall Corp. and complete the planned separation of Danaher into two companies. The other part lies in continuing to generate growth with its existing businesses. That said, here are five key things that management wants you to know about the company's future prospects.
1. The Pall merger finished early
Danaher's acquisition of filtration and purification leader Pall was completed on Aug. 31 -- ahead of schedule. It's early days, but management remains confident in their ability to generate growth from the deal. On the earnings call, CEO Tom Joyce said, "We remain confident in our ability to achieve the $300 million of cost synergies we previously outlined and have financed the acquisition in an interest-rate environment that is very favorable for highly rated companies."
2. The separation plan is on track
The plan to separate the company involves creating a science and technology company (which will retain the Danaher name) comprised of Danaher's existing life science and diagnostics and dental segments, its water quality and product ID solutions, and the Pall lines. The second company, NewCo, will comprise the test and measurement segment, along with a collection of its specialty industrial businesses.
The split was originally intended to be completed near the end of next year and according to Joyce, "we remain on track to complete the separation in 2016."
3. More acquisitions are coming
Acquisitions have been a key part of Danaher's business model over the last couple of decades, and management is showing no signs that it's going to let up just yet. Danaher is known for buying businesses and then applying its so-called Danaher Business System, or DBS, in an effort to raise long-term profitability.
Amid the ongoing Pall integration and the overarching separation plan, it would be easy to conclude that management's hands would be tied on acquisition activity. However, Joyce highlighted on the call that Danaher had made "nine acquisitions for approximately $650 million in the first nine months of 2015, bringing our total spend to over $14 billion." Moreover, he affirmed that, despite the split, acquisition activity would be ongoing for the future Danaher and NewCo: "...we expect to focus our activity on small and mid-sized transactions throughout the separation process."
4. Emerging market exposure isn't that troubling
Given the slowdown in emerging-market growth countries like China and Brazil, investors in the industrial sector are naturally concerned about the potential for future disappointments. Indeed, Joyce confirmed that demand was mixed in high-growth markets with strength in India balancing "weakness in Brazil, Russia, and the Middle East." Meanwhile, "In China, growth moderated slightly from first-half levels."
On the other hand, Danaher's revenue streams come from sectors of the economy like healthcare, public health and life sciences -- in other words, areas that are not bearing the brunt of the slowdown. Joyce picked up on this theme in his response to a question from Credit Suisse analyst Julian Mitchell: "As we look at China, we really continue to look at a number of sectors in that market where our businesses are extremely well positioned and where the sectors themselves are really quite attractive," he said.
5. Free cash flow will stay strong
Turning to valuation matters, Joyce noted that free cash flow was strong in the quarter, and served notice that the fourth quarter would see good conversion too. "Free cash flow for the quarter was $691 million, resulting in a free cash flow-to-net income conversion ratio of approximately 115%," he said. "We expect this solid performance to continue in the fourth quarter."
In the last four quarters, Danaher has generated around $3.2 billion in free cash flow, which represents around 5% of its current market cap. I think it's a pretty good valuation for a company growing earnings in the mid-teens.
Where next for Danaher?
Clearly, the Pall acquisition and subsequent separation of Danaher will take center stage for the next year or so, and both appear to be on track. Management claims to have a good acquisition pipeline in place, albeit with smaller companies, so there looks to be no significant change coming to the Danaher business model.
The slowdown in emerging markets doesn't appear to have affected Danaher as much as other industrial companies, and the valuation on the stock suggests there is more upside to come. Business as usual for Danaher.
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.