Danaher Has Conglomerate Disease (DHR)

By Douglas McIntyre | May 17, 2007 AAA

Being a U.S.-based conglomerate tends to be bad for a company's stock price. GE (NYSE: GE) is up only 5% over the last year, ditto for United Technologies (NYSE: UTX). The best performer in the group is Danaher (NYSE: DHR), up nearly 10%. Still, nothing to write home about.

The Problem with Conglomerates
Wall Street claims it does not like conglomerates because they are too hard to follow. For example, GE has a jet engine business, consumer finance business, enterprise finance business, locomotives business, medical products business... The list goes on and on.

The bull case for these stocks is that when one division is down, others pull the revenue for the entire business up. Owning a bunch of business combats cyclical earnings.

But, the bear case is that the businesses do not work together and that their value would be easier to see if they were discrete companies.

Danaher, Easier to Figure Out?
Danaher is much smaller than GE. Its revenue last year was $9.6 billion. GE's was over $163 billion. But, Danaher still operates in four segments: professional instrumentation, medical technologies, industrial technologies and tools and components. In the first quarter of this year, the company had revenue of $2.55 billion, up from $2.14 billion in the same period the year before. Net income was $254.8 million up from $215.7 million.

The company still has the classic conglomerate problem. While professional instrumentation, and medical technologies increases in revenue and operating earnings, industrial technologies was up only slightly. Revenue in tools and components was down. So was operating profit. One segment dragged down the performance of the company as a whole.

Danaher Not Easy to Figure Out
While Danaher does not have a large financial division or entertainment business, it still has four moving parts and sub-businesses within those parts. GE investors constantly worry that there is a problem in the financial services sector. Last quarter, it was exposure to sub-prime mortgages. Several Wall Street analysts have argued that GE's breakup value is higher than its value as a whole. While this may or may not be true, rumors about splitting the company have driven up the stock price.

Danaher is not likely to dodge the GE problem, which means it is probably going to stay in one piece, at least for awhile.

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