Nothing seems to change all that much at Danaher (NYSE:DHR). The company has a time-tested formula and business plan, and management executes it quite well. The value that this business creates tends to be obscured by GAAP accounting rules, but the valuation shows that most investors appreciate what the company can do. Though I believe management is probably playing it conservative with 2013 guidance, valuation is a little steep right now, even if you believe in the company's ongoing ability to produce value for shareholders.

Guide To Oil And Gas Plays: We've got your comprehensive guide to oil and gas shales in North America.

As Expected, a Strong End To The Year
Danaher updated its guidance back in December, so the actual final results for the quarter were not much of a surprise. That said, the company delivered meaningful top-line upside relative to initial expectations for the quarter, and margin performance was solid.

Revenue rose by 5.5% on a reported basis for the December quarter, with "core" or organic growth of 3.5%. As is usually the case for Danaher, some businesses led and others lagged. The relatively more economically-sensitive test & measurement (up 1%) and environmental (up 5%) were on the softer side. However, industrial technologies was up 10%, dental was up 4% and life sciences rose 6%.

Even with OK revenue growth, the company delivered solid reported and incremental margins. Gross margin improved almost two points, while operating income rose about 11% on a reported basis. Segment profits rose about 7%, with all segments except test and measurement showing flat-to-better margins.

SEE: How To Decode A Company's Earnings Report

Is Industrial Stabilizing?
Danaher management tends towards the conservative with its guidance, but I believe investors can draw some positives from the company's report. Test & measurement and motion control both seem to suggest that conditions in industrial markets are stabilizing. Admittedly, companies like Rockwell (NYSE:ROK) and Parker Hannifin (NYSE:PH) haven't had blow-out quarters, but most industrial CEOs have been maintaining the idea that conditions aren't getting any worse and should improve after mid-year.

Beckman Keeps Delivering, and China Awaits
Danaher management deserves significant kudos for how it has integrated and operated Beckman Coulter. Not only have the deal synergies been better than advertised, but the company has turned around faster than I thought likely. More to the point, Danaher has shown that it is unlocking the potential that I always thought Beckman had.

Management talked about a strong finish in healthcare for the December quarter, driven in part by demand in China. Like General Electric (NYSE:GE) and 3M (NYSE:MMM) before them, Danaher management has remained pretty positive on their opportunities in China - particularly in more basic care areas like core diagnostics and dental care. This could be a sizable growth opportunity; while every med-tech company wants to get bigger in China, I think the immediate opportunities are bigger in basic care than in premium-priced oncology drugs or orthopedic implants.

To that end, I wonder if Danaher has a deal or two left to make. Danaher has allowed healthcare/life sciences to become a very large part of the mix (arguably too large), but I wonder if the company would consider a deal or two for local companies - particularly in areas like value-priced dental implants or routine diagnostics.

SEE: Can Earnings Guidance Accurately Predict The Future?

Where Do They Go Next?
Management did 14 deals in 2012, and I have no reason to think that the company is going to change its pro-M&A policy. The only real question for 2013 is whether the company sticks with volume over deal value (in other words, doing a relatively large number of small deals) and what areas the company targets. With plans to shift the focus in test and measurement a bit and the increasing significance of software in industrial automation, those could be likely targets and I also would expect to see more tuck-in deals for the industrial technologies segment.

The Bottom Line
We're about midway through the reporting cycle, but it looks like Danaher is going to be one of the top performers in terms of organic growth among industrial conglomerates. Moreover, I see no reason to believe that the company won't continue to build shareholder value over time. The only real question is how much to pay for that growth.

I expect Danaher to remain one of the strongest long-term growth stories among the larger industrial conglomerates, with annual revenue growth in excess of 5% for the long-term. At the same time, I see ongoing potential for margin leverage and improved free cash flow (FCF) production such that free cash flow growth could be a point or so higher. Even so, putting those numbers in a discounted cash flow model suggests a fair value in the mid-$60s.

That's not much appreciation potential, and though bulls could argue that Danaher seldom ever trades at a bargain (and/or that you get what you pay for), I'd wait for a better entry price that gives at least 10% upside potential.

At the time of writing, Stephen D. Simpson owned shares of 3M for more than five years.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
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. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  5. PT (Perseroan Terbatas)

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

    An abbreviation of "limited," Ltd. is a suffix that ...
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!