There was nothing spectacular about Danaher Corp.'s (NYSE:DHR) investor and analyst meeting, but that might be just what investors are looking for right now. Danaher offers a compelling mix of earnings drivers in 2016, and most of them aren't reliant on the areas of the economy that have disappointed in 2015. Let's take a closer look at the investor meeting and why Danaher is an attractive stock for 2016.
Danaher Corp. investor meeting
The company confirmed its 2015 EPS guidance -- no mean feat when other industrials such as 3M Company (NYSE:MMM) have cut estimates twice in the past few months -- and gave 2016 adjusted EPS guidance for $4.80 to $4.95, which implies growth of 12% to 15%. However, the likelihood that Danaher will hit these numbers is of paramount concern. That said, here are three main reasons to like Danaher stock in 2016:
- The company's earnings prospects are largely dependent on internal execution, particularly with the integration of Pall Corp.
- A large part of Danaher's end markets tend to rely on secular, rather than cyclical, growth and are also in areas of relative strength in the industrial economy.
- Around 60% of the remaining Danaher business is in recurring revenue streams, which are less dependent on the economy.
Next year promises to be a busy one for Danaher, with the company set to split in two. The plan involves incorporating the acquired Pall Corp. business into the remaining Danaher -- the dental and life science and diagnostics segments, alongside water quality and product ID businesses. The newly created company, Fortive Corporation, will comprise Danaher's test and measurement segment along with its automation, sensors and controls, and specialty industrial business carved out of the industrial technologies segment.
Moreover, a breakout of Danaher's EPS guidance for $4.80 to $4.95 in 2016 shows that $0.40 of the projected $0.50-$0.65 increase is expected to come from Pall Corp., with only $0.11 to $0.26 forecast from core growth. In other words, internal execution is key.
That said, Danaher forecasts 2% to 3% core revenue growth for 2016, higher than the 2% core revenue growth forecast for its fourth quarter of 2015. However, Danaher's growth prospects tend to be less cyclical than those of other diversified industrials peers such as 3M Company or Illinois Tool Works (NYSE:ITW).
Based on 2015 figures, the remaining Danaher will generate 53% of its revenue from life science and diagnostics, with 16% coming from dental and 12% from water quality -- in other words, revenue that benefits from increasing regulatory, health, and food-safety regulations. Moreover, if a company is going to be exposed to emerging-market growth, then in the current environment, healthcare and water are better end markets than, say, 3M's ailing electronics and energy segment or Illinois Tool Works' industrial-focused solutions.
In addition to favorable end markets for Danaher's remaining business, the company generates 60% of its revenue from recurring sales, many of which come from high-margin consumables. For example, 80% of Danaher's diagnostics revenue is in consumables and services, and 75% for Pall Corp. Here's a breakout of overall recurring revenue in the remaining Danaher business:
|Segment||Revenue (billions)||Recurring Share|
Recurring revenue streams help to prevent downside risk given a major slowdown in the economy. In addition, management outlined that cost savings of $100 million from Pall Corp. in 2016 would be more than the initially assumed $60 million.
Danaher's presentation confirmed the company's position as a relatively safe haven in the industrial sector. It's true that Fortive's more cyclical earnings could come under pressure -- future Fortive CEO James Lico guided toward flat organic growth in 2016 in the investor presentation -- and this situation could affect the spinoff planned for the fall.
All told, Danaher isn't without risk. However, its mix of recurring revenues and stable end markets makes its earnings of a higher quality than its peers' in 2016. Moreover, the larger part of its earnings growth is expected to come from internal execution, making it a stock well worth considering for those worried about the economy in 2016.
Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends Illinois Tool Works. 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.