January 29, 2015 Danaher Corporation (DHR-NYSE) Analyst Note NEUTRAL Current Recommendation Prior Recommendation Outperform Date of Last Change 05/15/2005 Current Price (01/28/15) $82.85 Target Price $87.00 SUMMARY Danaher s fourth-quarter 2014 earnings came in line with the Zacks Consensus Estimate and above the prior-year figure. Core revenue growth, driven by the company s operating culture Danaher Business System remained the primary driver. The system has been effectively augmenting the company s margins and cash flow. Also, the company s balance sheet position is improving, which promises significant acquisition capacity and is likely to drive growth, going forward. However, sluggish economic conditions across some key regions and unfavorable currency translations continue to bother the company s financials. Hence, we maintain our longterm Neutral recommendation on the stock. SUMMARY DATA 52-Week High $87.06 52-Week Low $71.70 One-Year Return (%) 10.76 Beta 1.18 Average Daily Volume (sh) 3,057,567 Shares Outstanding (mil) 703 Market Capitalization ($mil) $58,244 Short Interest Ratio (days) 2.92 Institutional Ownership (%) 77 Insider Ownership (%) 14 Annual Cash Dividend $0.40 Dividend Yield (%) 0.48 5-Yr. Historical Growth Rates Sales (%) 13.4 Earnings Per Share (%) 15.3 Dividend (%) 38.2 using TTM EPS 22.4 using 2015 Estimate 19.3 using 2016 Estimate 17.9 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * Low, Type of Stock Large-Blend Industry Diversified Ops Zacks Industry Rank * 212 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 4,445 A 4,738 A 4,669 A 5,267 A 19,118 A 2014 4,663 A 4,964 A 4,870 A 5,417 A 19,914 A 2015 4,857 E 5,190 E 5,123 E 5,747 E 20,917 E 2016 21,955 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.75 A $0.87 A $0.84 A $0.96 A $3.42 A 2014 $0.81 A $0.95 A $0.90 A $1.04 A $3.70 A 2015 $0.92 E $1.09 E $1.07 E $1.22 E $4.30 E 2016 $4.62 E Projected EPS Growth - Next 5 Years % 12 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
RECENT NEWS Danaher Q4 Earnings Meet, Revenues Miss Estimates Jan 27, 2015 Danaher reported adjusted earnings of $1.04 a share in fourth-quarter 2014, in line with the Zacks Consensus Estimate. Adjusted earnings increased 8.3% compared with the prior-year figure of $0.96 per share. Also, Danaher s full-year 2014 earnings of $3.68 per share increased 7.6% as compared to $3.42 per share reported year ago. The increase in the bottom line was mainly attributable to core revenue growth, driven by the company s operating culture Danaher Business System. The system has been effectively augmenting the company s margins and cash flow. On a GAAP basis, the company s fourth-quarter 2014 earnings came in at $0.92 per share (including $0.09 related to gain on the sale of marketable securities), which decreased 17.1% on a year-over-year basis. Moreover, the company s full-year 2014 earnings of $3.63 per share on a GAAP basis came 4.5% below the year-ago figure. Inside the Headlines Danaher reported total sales of $5,417.2 million, an increase of 3.0% year over year. However, reported revenues fell short of the Zacks Consensus Estimate of $5,420 million. This was attributable to core and acquisitions revenues increases of 4.0% and 2.5%, respectively, on a year-over-year basis, which was partially offset by unfavorable currency translation effect of 3.5%. On the other hand, Danaher s operating margin dipped to 16.4% from 16.9% in the quarter. For the full year, the company s operating margin rose to 17.2% from 17.1% on a year-over-year basis. As per the segments, revenues in the Test & Measurement segment increased 1.7% year over year to $913.4 million. The segment operating margin rose yearly to 17.9% from 16.6%. Revenues in the Environmental segment were up 5.6% to $988.5 million. The segment reported an operating margin of 19.2%, a decline from 22.5% in the year-ago quarter. Life Sciences and Diagnostics segment revenues were up 2.9% year over year to $1,994.9 million. The operating margin for the quarter decreased yearly to 16.6% from 16.7%. Revenues from the Dental segment grew 6.2% year over year to $626.9 million with operating margin dropping to 9.5% from 13.7%. In the Industrial Technologies segment, revenues dipped 1% to $893.5 million, while the operating margin increased to 20.4% from 17.3% on a year-over-year basis. Liquidity Danaher exited the year 2014 with cash and equivalents balance of $3,005.6 million versus $3,115.2 million as the end of 2013. The company had a long-term debt of $3,401.5 million at the end of the year, as compared to $3,436.7 million as on Dec 31, 2013. At the end of 2014, Danaher s cash flow from operating activities increased to $3,758.4 million from $3585.3 million in the prior-year period. Equity Research DHR Page 2
Guidance The company expects first-quarter 2015 adjusted earnings per share to be in the range of $0.90 $0.94. Also, Danaher expects its 2015 adjusted earnings per share to be in the range of $4.30 $4.40 per share. VALUATION Currently, Danaher s shares are trading at 22.4x TTM earnings, compared with the peer group average of 26.6x and the S&P 500 average of 18.6x. Over the last five years, shares have traded in the range of 15.5x to 23.2x trailing 12-month earnings. Therefore, it is currently trading towards the high point of its historical range, which indicates a chance of limited upward movement. Our target price is $87.00 or 20.2x 2015 EPS, which indicates a very limited chance of upside movement. Hence, we have maintained our Neutral recommendation. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Danaher Corp. (DHR) 19.3 17.9 12.4 16.6 22.4 23.2 15.5 Industry Average 24.3 15.3 10.6 11.8 26.6 108.7 10.2 S&P 500 16.2 15.1 10.7 16.1 18.6 19.4 12.0 Icahn Enterprises, L.P. (IEP) 10.1 15.8 5.0 6.2 18.8 122.3 3.9 3M Company (MMM) 20.0 18.2 11.0 15.7 21.8 21.9 12.2 Leucadia National Corporation (LUK) 16.9 43.0 474.8 3.4 Keppel Corporation Limited (KPELY) 9.0 9.6 6.7 7.6 15.2 8.3 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Danaher Corp. (DHR) 2.5 2.5 1.7 11.1 0.1 0.5 12.8 Industry Average 2.0 2.0 2.0 10.0 0.7 2.2 9.6 S&P 500 5.1 9.8 3.2 24.8 2.0 Equity Research DHR Page 3
Earnings Surprise and Estimate Revision History NOTE THIS IS A NEWS-ONLY UPDATE; THE REST OF THIS REPORT HAS NOT BEEN UPDATED YET. Equity Research DHR Page 4
OVERVIEW Danaher Corporation (DHR) is a global conglomerate that designs, manufactures and markets diverse lines of industrial and consumer products. The company was initiated as a Massachusetts based 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. It adopted the name Danaher in 1984 and was reincorporated as a Delaware corporation following the 1986 annual meeting of its shareholders. Danaher derives its sales from the design, manufacture and marketing of professional, medical, industrial, commercial and consumer products. Danaher organizes its businesses into five operating segments: The Test & Measurement segment (17.9% for the full year 2013 revenues came from this segment). This segment is a leading global provider of electronic measurement instruments, monitoring, management and optimization tools for communications networks and related services that are used in the design, development, manufacture, installation, deployment and operation of electronics equipment and communications networks and services. The Environmental segment (17.3% for the full year 2013 revenues came from this segment) provides products that help protect the water supply and air quality and serves two primary markets: water quality and retail/commercial petroleum. The Life Sciences & Diagnostics segment (35.9% for the full year 2013 revenues came from this segment) offers a broad range of research and clinical tools that are used by scientists to study cells and the components of cells to gain a better understanding of complex biological matters. Pharmaceutical and biotechnology companies, universities, medical schools and research institutions use these tools and this information to study the causes of disease, identify new therapies and test new drugs and vaccines. The Diagnostics businesses offer a broad range of analytical instruments, reagents, consumables, software and services that are used to diagnose diseases, make treatment decisions and monitor patients in hospitals and other critical care settings. The Dental segment (11.0% for the full year 2013 revenues came from this segment) is a leading worldwide provider of a broad range of equipment and consumables for the dental market, focused on developing, manufacturing and marketing innovative solutions for dental professionals around the world. The global dental market encompasses the diagnosis, treatment and prevention of diseases and ailments of the teeth, gums and supporting bone. Industrial Technologies segment (18.0% for the full year 2013 revenues came from this segment) manufactures products and sub-systems that are typically incorporated by customers and systems integrators into production and packaging lines as well as incorporated by original equipment manufacturers (OEMs) into various end-products. Many of the businesses also provide services to support their products, including helping customers integrate and install the products and ensure product uptime. Equity Research DHR Page 5
REASONS TO BUY In order to achieve sales growth, better financial performance and upper quartile cash flow, Danaher uses a set of tools and processes called the Danaher Business System (DBS). This is especially designed to continuously improve business performance in the critical areas of quality, delivery, cost and innovation. Within the DBS framework, the company follows a number of strategic initiatives with respect to idea generation, product development and commercialization, global sourcing of materials and services, manufacturing improvement and sales and marketing. DBS has allowed Danaher s various operating companies like Hach, Fluke, Veeder-Root, AB Sciex, Implant Direct, Radiometer as well as Esko to gain an edge over their peers. The company follows an aggressive acquisition strategy and is on a constant lookout for business that strategically fits its existing business portfolio and helps the company expand and diversify into new and attractive business avenues. The company s acquisition of Videojet in 2002 has proved to be one of its most important strategic moves. At present, Videojet is the leader of the coding, marking and printing market. Since the beginning of this year, the company has announced acquisitions worth $3.3 billion. In the last quarter, the company closed the acquisition of the clinical microbiology business of Siemens Healthcare Diagnostics under its Beckman Coulter division. Recently, Danaher announced the merger of its Communications business with NetScout Systems, Inc. (NTCT), valued at about $2.6 billion. Danaher's Tektronix Communications, Fluke Networks and Arbor Networks form part of its Communications business. Post Merger, the combined entity will become a leading network management tools and security solutions provider across the globe. Danaher, gradually evolving as a healthcare company, has broadened its presence in the healthcare and dental markets which are expected to grow in the long term owing to rise in the aging population and increased spending on healthcare and fitness. The aged population is believed to be one of the fastest-growing age groups over the next couple of decades and therefore we believe this will lead to a rising demand for health care products and services in Danaher's Dental and Life Science & Diagnostic businesses. In 2013, approximately 36% of revenues were derived from Life Sciences & Diagnostics and Dental segments. The company is increasing its investment in the commercial and innovation area in this segment. In 2013, the company s business in the segment grew significantly in developing nations like China (more than 20% growth) driven by the increased government spending on the healthcare industry. Moreover, the company s Beckman Couture Diagnostics, Leica Biosystems and AB SCIEX businesses has been performing impressively well in the recent times. The company has strategically diversified its business geographically and expects to witness robust growth in diverse economies including Japan, China, and Western Europe. Danaher has more than half of its revenues coming from outside the U.S with more than 25% of the revenues coming from highgrowth markets like China. While the U.S. markets are forecasted to grow at the rate of 2%-4%, the emerging markets like India and China have the potential to grow twice as much. In 2013, most of In the quarter, the company s businesses like Test & Measurement, Instruments, Gilbarco Veeder-Root, Diagnostics and Dental witnessed strong growth in China. REASONS TO SELL The company s business strategy hinges on acquiring companies and making investments that complement its existing businesses. These acquisitions and investments consume significant resources, which could adversely affect its operating results. Also, acquisitions entail huge integration costs, which Equity Research DHR Page 6
often become a drag on the profitability of the company. In the quarter, the company also narrowed its guidance, anticipating the integration costs for the recent acquisitions, especially the Siemens microbiology unit is likely to weigh on company s financials. The company operates in a highly competitive market. The company s businesses operate in industries that are intensely competitive and have been subject to increasing consolidation. Owing to the range of the products and services Danaher sells and the variety of markets it serves, the company deals with a variety of competitors. The ongoing economic weakness across the globe, especially the uncertainty in Europe owing to the slowdown in Germany, may have an adverse impact on the company s business. This apart, prevailing weakness in Russia and parts of Latin America including Brazil also remains a concern going ahead. The company is highly prone to be impacted by adverse foreign currency translations as a significant portion of its revenues is derived from regions outside the U.S. the recent strengthening of dollar can also pose headwinds for Danaher. Equity Research DHR Page 7
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of DHR. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1116 companies covered: Outperform - 15.8%, Neutral - 77.2%, Underperform 6.4%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Coverage Team QCA Lead Analyst Analyst Copy Editor Content Ed. Reasons for Update 6B Supriyo Bose Lekha Gupta Lekha Gupta N/A Lekha Gupta Analyst Note Equity Research DHR Page 8