Gathering New Information about Stocks, Health, and Sports

Introduction

Danaher Corporation (DHR) is a $23.38 billion company in the scientific and technical industry. Market capitalization competitors in this industry include Thermo Fisher Scientific, Waters Corporation, and Applied Biosystems Group. The scientific and technical industry is up 21.08% over the past year compared to the S&P 500 which is down 7.79% during the same period. Over the past month, the industry has been down 8.13%, while the S&P 500 has been down 5.99%. After a strong sell-off earlier in the past month, there is a strong potential for technologically-inclined companies to grow. Evidence comes from a potential low in scientific and technical stocks, with a possible breakout inevitable. Danaher’s growth and valuation illustrate the potential for a strong earnings report next quarter.

Business

This section describes what Danaher produces. According to Reuters, Danaher “derives its sales from the design, manufacture and marketing of professional, medical, industrial and consumer products.”Supporting a variety of productions, Danaher hedges itself with a horizontal and vertical control of its business model. The types of products Danaher focuses on include “Professional Instrumentation, Medical Technologies, Industrial Technologies, and Tools & Components.” Even more interestingly is where Danaher produces these products. While most sales are made in North America, about half comes from overseas. As the current U.S. dollar is continuing to depreciate, because of lower interest rates, there is a great propensity for foreign consumers to export more U.S. goods at a cheaper exchange rate. Danaher benefits immensely from this event.

Specifically, each business segment produces a variety of products. Professional Instrumentation focuses on products to help professionals with their work. Danaher focuses even more specifically on two different markets: water and petroleum. Detailed to water, Danaher creates instruments to detect “chemical, physical and microbiological parameters in drinking water, wastewater, groundwater and ultrapure water.” This model is sold by direct sales personnel in most situations. Danaher also creates testing equipment used to “measure voltage, current, resistance, power quality, frequency, pressure, temperature and air quality.” These products are directly sold to engineers, electricians, and technicians.

In addition to Professional Instrumentation products, Danaher focuses on Medical Technologies. As with Professional Instruments, Medical Technologies are used to help professionals at work, including dentists and life scientists. Over two-fifths of sales come from Europe. Sold through independent distributors, the dental section creates and manufactures products including “air and electric hand pieces; treatment units; digital imaging and other visualization and magnification systems.” Other broader products include blood gas measurers (Radiometer), microscopes, and intensive care units.

The third business segment, Industrial Technologies, focuses on products for industries like motion businesses. Products sold to these consumers include custom motors, drives, and brakes. There is also a product identification business dedicated to reading bar codes and date codes, which is very useful for OEMs. The last business segment, Tools & Components produces products like sockets and ratchets under its own brand name. These products are then sold into industrial and consumer markets.

Growth

Danaher has illustrated solid growth prospects over the past year. According to Reuters, Danaher reported an $11.03 billion revenue product last year. This number is over 16.48% higher than it was the previous year. Compared to the industry’s average of 48.12%, some investors may question the large discrepancy between the two averages. However, Danaher is the leader, both market-cap and revenue wise, for this industry. Comparing the revenue growth figure to market-cap competitors and investors can have a more relevant range. Waters only grew 15.06% during the same period year over year, and Applied Biosystems only grew 6.45% during that same time period. In terms of earnings, Danaher saw growth of over 7.92%. However, market-cap competitor Thermo Fisher only reported a 6.25% increase in earnings. What’s even more interesting is Danaher’s five year averages for these numbers. Danaher usually averages revenue growth of 19.22% and earnings growth of 21.65%. Both numbers are respectable to the industry averages of 22.78% and 17.77%, respectively. And the earnings growth is even higher than all three aforementioned competitors, which is an excellent attribute. Therefore, there is a significant historical evidence of a strong financial background, which may have implications of further success.

Another way to evaluate Danaher’s growth can come through margins. Over the past year, Danaher has seen gross, operating, and net income margins of 45.72%, 15.79%, and 11.01%. Comparing these numbers to the industry averages of 46.67%, 9.73%, and 6.39% respectively, there is evidence that Danaher is controlling its cost and producing more money for every dollar of revenue. These figures are in line with the company’s five year averages (which show strong precedence), and these figures are also higher than the operating and net income margins of competitors Applied Biosystems and Thermo Fisher. Therefore, along with strong growth prospects, Danaher illustrates its capability to control both product and period costs.

Combining these bits of information together and ROE emerges. ROE is how much net income is produced for every dollar of shareholder equity. According to Reuters, Danaher saw an ROE of 15.44% over the past fiscal year. While this number is below the five year average of 17.30%, the number is higher than the industry average of 10.13% and the competitors’ averages of 5.49% (Thermo Fisher) and 15.27% (Applied Biosystems). While investors may be cautious that ROE is dropping year over year, investors need to realize that the past couple of months has been tough for the economy. However, once the economy starts to grow again, there is the potential for Danaher’s continued growth, especially given the company’s historical figures. The same logic also applies for Danaher’s 8.04% ROA and 9.75% ROI.

Valuation

With fairly high growth estimates and historical data, there should be evidence of an overvalued company. However, this is not the case. Currently the industry supports a P/E ratio average of 24.86 and a price to sales average of 2.93. Danaher sees a forward P/E ratio of 16.77 and a forward price to sales ratio of 1.90. While much can be said about the stock market’s recent bear run, there is plenty of evidence regarding growth that Danaher’s share price has been hit too hard. While some investors may claim the same is true for all companies in this industry, a few ideas emerge. Thermo Fisher’s valuation is high at 17.43, despite weaker growth expectations. Waters Corporation (18.53) and Applied Biosystems (18.96) follow the same pattern. The trend is an excellent resource, and given Danaher’s previous financial success, the company is too undervalued given its growth prospects. Further evidence comes from Danaher’s low PEG ratio of 1.24, which is lower than competitors’ figures such as 1.57 (Applied Biosystems).

Efficiency

Danaher is efficient. Inventory turnover at 5.49 also follows a better pattern compared to the industry’s 4.45 number. Moreover, asset turnover is also strong at 0.73 compared to the industry’s 0.70. Receivables turnover also illustrates a number of 6.06, illustrating cash received every 60 days, instead of the industry average 63 days. In terms of liquidation, Danaher’s current ratio is 1.44—a solid number related to debt and equity purchases. This statistic coincides with the company’s low debt to equity ratio of 0.41. Some investors may question low debt financing, but the lines of liquidity are uncertain now. Once interest rates fall a bit more, the company may take one some more risk. Moreover, institutions own 72.27% of all Danaher shares. Since the institutional investors have a larger gross amount of capital to lose compared to the retail investor, a high institutional percentage illustrates confidence in the stock's ability. The company also supports a dividend yield of 0.16%, which is higher than both Fisher Thermo’s and Waters’s yield (0%).

Technical Analysis

Danaher performed flat in the past year. The company’s share price has decreased 0.78% year-to-year. This type of growth is stable for a recessionary-type economy, especially considering technology’s recent hard-hit. There seems to be some support at the 70 dollar share price range dating back to earlier March 2007. The last time Danaher reached this amount the company rebounded and appreciated 20%. There is a possibility a similar situation could occur in the future.

More specific to the current month, Danaher illustrates strong technical signals. Parabolic SAR is above the current share price. This event usually signals an upturn in share price. The company is a little undervalued compared to the RSI index at 30.79, but it is better to be an advocate of fundamental valuations before technical valuations. Therefore, while now isn't the most ideal time to purchase shares of Danaher according to technical analysis, purchasing shares will still produce strong long terms gains.

Conclusion

Danaher is a great acquisition for any portfolio. The company's business model and fundamental analysis are both strong. It is very rare to find a company that has both strong valuation and growth, so it is wise to take advantage of these situations as they arise.

-Dennis Biray
February 8th, 2008