I don't envy the analysts who have to follow Danaher (NYSE:DHR) on a full-time basis. This conglomerate plays in markets as diverse as electronic testing, medical equipment, bar code scanners, and hand tools. That's a lot of very different businesses to run, but so far management has been more than up to the task -- a quick glance at a long-term chart shows a pretty appealing performance.
Danaher is not a rock 'em, sock 'em organic growth story. While total reported sales did increase 19% in the quarter, organic growth was only 5.5% of the story. Twelve percent of the growth came from acquired businesses and 1.5% came for currency gains. Operating margins contracted very slightly, and the company managed to post operating income growth of 18%.
Looking at each of Danaher's businesses would take far too much time and space, so here's a brief overview by the three major categories. Professional instruments saw 34% revenue growth (7.5% organic growth) and a modest deterioration of operating margin to 19.2%. Industrial technology posted revenue growth of 14.5% (4.5% organic) and an operating margin of 15.3% (down very slightly from 15.4%). Tools and components saw revenue drop 2% (though up 4% organically before a divestiture) and operating margins fall from 15.9% to 14.9%.
For the six months to date, free cash flow has grown by 18% over last year's level -- and that's with a performance in the second quarter that was a bit disappointing relative to the past. I do believe that free cash flow tells an important tale here -- say what you will about the odd mix of businesses and the dependence upon acquisitions for growth, the company still delivers the goods in terms of cash flow.
Better still, annualizing the second quarter's results leaves you with a return on assets of more than 10% and a return on equity of close to 20% -- two hallmarks of well-run companies.
I've got to say that Danaher ended up being a more interesting company than I'd given it credit for prior to researching it for this piece. I wouldn't say that it's my favorite industrial conglomerate -- that distinction would have to go to 3M (NYSE:MMM) or UnitedTechnologies (NYSE:UTX) -- but it's a much more promising investment than I would have previously thought.
For on industrial conglomerates:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
