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Acquisitions and Steady Business Operations Help Danaher
GuruFocus.com
- By Mark Yu
The $57.7 billion, D.C.-based diagnostic and research company reported its second quarter 2017 results mid-July. In the first half of 2017, Danaher registered 6.7% year-over-year revenue growth rate to $8.72 billion and profits of $1.06 billion or $1.51 a share (12.2% margin) compared to $1.42 billion or $2.03 a share in the year-prior period, a 24.9% drop.
As observed, operating costs rose 8.8% to $3.51 billion while the company did not record any income from the sale of marketable equity securities therefore having a reduction of $223 million in the year-prior period, thus helping reduce its profits in comparison to the prior-year period.
Excluding this supposed one-time gain in the equation, Danaher would still have recorded profits of 10 percentage lower.
"During the second quarter, we delivered double-digit adjusted earnings per share growth, generated strong cash flow, and our two most recent large acquisitions - Pall and Cepheid (CPHD) - continued to perform very well.
"As we look to the second half of the year, we expect our core growth rate to accelerate compared to first half levels off of improving order trends and as recent acquisitions become part of our core revenue. We believe that the power of the Danaher Business System, significant opportunities across our portfolio, and a strengthening balance sheet position us well for the remainder of 2017 and beyond."
-- Thomas P. Joyce, Jr., president and Chief Executive Officer
Valuations
Danaher is undervalued compared to peers. According to GuruFocus data, the company had trailing P/E ratio 26.5 times vs. industry median 36.8 times, P/B ratio 2.4 times vs. 3.9 times, and P/S ratio 3.4 times vs. 3.7 times.
The company also had a trailing dividend yield 0.64% with 19% payout ratio.
Average revenue and earnings-per-share estimates indicated forward multiples of 3.2 times and 21.08 times.
Total returns
Danaher has underperformed the broader S&P 500 index so far this year, having generated total returns of 7.05% vs. 11.67% (Morningstar).
It also outperformed the index over five years with a return of 15.89% vs. 15.08%
Danaher
According to filings, Danaher Corp., originally DMG Inc., was organized in 1969 as a Massachusetts real estate investment trust. In 1978 it was reorganized as a Florida corporation under the name Diversified Mortgage Investors Inc., which in a second reorganization in 1980 became a subsidiary of a newly created holding company named DMG Inc. DMG Inc. adopted the name Danaher in 1984 and was reincorporated as a Delaware corporation in 1986.
Danaher Corp. designs, manufactures and markets professional, medical, industrial and commercial products and services, which are typically characterized by strong brand names, innovative technology and major market positions.
In 2016, Danaher generated 40% of its revenue in North America, 28% in Europe, 24% in Asia/Australia and the remaining in other regions.
Danaher's business consists of four segments: Life Sciences, Diagnostics, Dental and Environmental & Applied Solutions.
Life Sciences
The Life Sciences segment offers a broad range of research tools that scientists use to study the basic building blocks of life, including genes, proteins, metabolites and cells, in order to understand the causes of disease, identify new therapies and test new drugs and vaccines.
The segment, through its Pall Corp. business, is also a leading provider of filtration, separation and purification technologies to the biopharmaceutical, food and beverage, medical, aerospace, microelectronics and general industrial sectors.
Revenue in the first half grew 4% year over year to $2.69 billion (31% of sales excluding adjustments) and delivered an operating margin of 16% vs. 14% in the same period last year.
Diagnostics
The Diagnostics segment offers analytical instruments, reagents, consumables, software and services that hospitals, physicians' offices, reference laboratories and other critical care settings use to diagnose disease and make treatment decisions.
Revenue in Diagnostics grew 16% year over year to $2.77 billion (32% of unadjusted sales; largest) and had margins of 11% vs. 17% in the year-prior period.
Dental
The Dental segment provides products that are used to diagnose, treat and prevent disease and ailments of the teeth, gums and supporting bone, as well as to improve the aesthetics of the human smile.
Danaher is a leading worldwide provider of a broad range of dental consumables, equipment and services.
Revenue in the segment fell 1% year over year to $1.36 billion (16% of unadjusted sales) and recorded margins of 15% (same as prior year period).
Environmental & Applied Solutions
The Environmental & Applied Solutions segment products and services help protect important resources and keep global food and water supplies safe.
Revenue in the first half for the segment grew 5% year over year to $1.9 billion (22% of unadjusted sales) and had margins of 23% (most profitable; same to prior year period).
Sales and profits
In the past three years, Danaher had a revenue decline average of (-)4.06%, profit reduction average of (-)1.78% and profit margin average of 14.8%.
Cash, debt and book value
As of June, Danaher had $726 million in cash and equivalents and $11.6 billion in debt with a debt-equity ratio 0.47 times vs. 0.59 times in the same prior-year period. Overall debt dropped by $3.06 billion year over year while equity also declined by $455 million.
Of Danaher's $45.6 billion assets, 79.5% were identified as blue sky elements (goodwill and intangibles) while book value has decreased by 1.8% year over year to $24.6 billion.
Cash flow
In the first half 2017, Danaher's cash flow from operations dropped by 23.6% year over year to $1.57 billion. In addition to lower profits, the company recorded higher cash outflows in its payables and accrued expenses and other liabilities.
Capital expenditures were $306.5 million leaving Danaher with $1.26 billion in free cash flow vs. $1.78 billion in the same period last year. The company also provided $64.4 million worth of payments to noncontrolling interest and $183.9 million in shareholder dividends--representing 19.6% of free cash flow vs. three-year average 10.7%.
Danaher also raised $35.8 million from share issuances and allocated $1.3 billion in debt repayments net any issuances for the recent six months.
In review, the company generated an accumulated $9.26 billion in free cash flow, paid out $982 million in dividends, raised $546 million in share issuances and raised $11.3 billion in debt (net repayments).
Conclusion
Except for its dental business (16% of unadjusted sales), Danaher executed well in its operations.
As observed, the company sees acquisitions as one of its strategy in enhancing overall business improvements. These strategic initiatives could not be felt or as no significant changes in Danaher's overall profit/revenue generation. In the first half of 2017, Danaher actually has already acquired three businesses, approximately $94 million in cash, which complements its operations (Life Sciences and Environmental & Applied Solutions).
These acquisitions result in inflated blue sky elements in the company's balance sheet, although it is still less leveraged compared to its prior-year period.
In addition, Danaher seems to be addicted in raising few (millions) of new shares each year despite its steady cash flow stream and has maintained a quite conservative payout ratio in recent years (approximately 11% on average).
Fourteen analysts have an average price target of $90.93 a share vs. $83.05 at the time of writing. Applying three-year revenue growth and P/S multiple averages followed by a 25% margin indicated a figure of $50.71 a share.
In summary, Danaher is a hold.
Disclosure: I do not have shares in any of the companies mentioned.
