For a company that rarely misses earning expectations and is typically viewed as a credible commentator on near-term economic conditions, Danaher's (NYSE:DHR) third quarter results can't leave investors feeling too great. Although the company's long-term strategy of growth-through-acquisition and fierce cost efficiency is very likely to continue, the near-term outlook has definitely worsened. Given that this stock has often sported a premium multiple, performance could continue to lag until investors feel more optimistic about the macro outlook.

Credit Card Comparison: Find the credit card that is just right for you

Another Disappointing Quarter
Although Danaher management lowered guidance back at the second quarter, apparently they did not go far enough, as the company posted a modest miss. Perhaps more concerning for long-term shareholders are the signs that the focus on M&A in the life sciences/healthcare space hasn't yet really paid dividends.

Revenue fell 2% as reported for the third quarter, with organic revenue up just 1%. Although only a relatively small number of major industrials have reported so far, Danaher's results fit broadly in with Dover (NYSE:DOV) and Honeywell (NYSE:HON), though behind longer-tail names like General Electric (NYSE:GE) and Textron (NYSE:TXT).

Gross margin improved more than three points for the quarter. Operating performance was more mixed, due in large part to various charges and items. Looking at the core segment earnings, profits were pretty much flat on a year-on-year basis.

SEE: Everything Investors Need To Know About Earnings

No Real Areas of Strength
Unfortunately, Danaher didn't really have any particularly bright spots for the quarter. The economically-sensitive test and measurement business was down about 5% as reported, with Fluke down in the double-digits. That's reason for pause, as Fluke has often been a pretty solid barometer of real-time economic conditions. It's also not great news for Agilent (NYSE:A), though their businesses do not line up exactly.

Environmental segment revenue rose 3%, while life sciences and industrial tech fell 3% each and dental dropped 1%. Contrary to some of the early reports I've read, I'm not that bothered by the life science results. I don't see any particular reason to think that Agilent or Thermo Fisher (NYSE:TMO) are going to have great quarters in their life science businesses. On a more positive note, Beckman continues to come along, and I think this will be a case of "slow and steady wins the race."

SEE: How To Decode A Company's Earnings Reports

Judging a Long-Term Story by Short-Term Results
I've long had some issues with Danaher's valuation, but I have never questioned the company's model or its prospects for better-than-peer long-term growth. Said differently, I'd be careful about selling a long-held position just because of rocky going in the short-term.

The short term does seem to be getting rockier. Management lowered guidance again and seemed pretty cautious (if not bearish). At the same time, it seems like some investors and analysts are raising more questions about the company's recent M&A dealings and questioning whether management has lost its mojo. Once again, I think this is a case of differing time horizons; the life science and healthcare markets are definitely soft right now (and softer than most companies thought they'd be), but I have a hard time seeing how or why the long-term growth won't materialize as emerging markets spend more money on healthcare and more developed economies deal with their aging populations.

SEE: Mergers And Acquisitions: Introduction

The Bottom Line
Danaher has a history of delivering better growth than other industrial comps like Dover and Illinois Tool Works (NYSE:ITW), and the valuation reflects that higher ongoing growth expectation. That said, I have my doubts as to whether that outsized growth can continue - more as a consequence of Danaher's size than any emergent deficiencies in the business.

Even with an estimate of high single-digit free cash flow growth, these shares don't look especially cheap. For these shares to be undervalued by the market today, management needs to either lift (and sustain) free cash flow margins in the high teens or revenue growth in the high single digits. Either implies a decade-long average of over 10% compound free cash flow growth, and that's a pretty aggressive assumption, even for a well-run company like Danaher.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Markets

    Why Gluten Free Is Now Big Business

    Is it essential to preserving your health, or just another diet fad? Either way, gluten-free foods have become big business.
  3. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  4. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  5. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  6. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  9. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  10. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!