Discovering Danaher (DHR)

Acquisitions are the primary driver of growth at Danaher Corp (DHR), a manufacturing conglomerate.  In the past five years, 14.5% of DHR’s sales growth has been due to acquisitions, some 75% of its total sales growth according to Wikinvest.  Eighteen companies were acquired in 2008, with Tektronix the largest to date ($2.8 B).  S&P reports 12 acquisitions in 2007 and 11 in 2006. 

DHR was this month’s Online Stock Study at the Better Investing website.  These studies complete a SSG in about one hour with online participants making the judgments by consensus.  This one was led by Gary Ball, an experienced volunteer educator, retired investment professional and member of BI’s Board of Directors. Thanks Gary for an excellent SSG study.

Company Background:

Danaher manufactures mostly high-tech equipment and operates in four segments: Professional Instrumentation (38% of 2008 Sales), Medial Technologies (26%), Industrial Technologies (26%), and Tools and Components (10%). Tektronix, before its acquisition, was the market leader in high precision oscilloscopes and DHR also makes Craftsman hand tools sold by Sears.

Danaher’s strategy is to buy underperforming companies and make them run more efficiently. Morningstar explains that DHR acquires companies that possess proprietary technology and a strong market position.  It focuses on niche markets that permit economies of scale and then uses its Danaher Business System to improve profitability and cash flow, and will divest if the desired return on investment is not achieved.

The Bob Adams one-click spreadsheet analysis of DHR’s 2008 Annual Report shows a total score of 63 out of 100 with 11 Bullish results (good things such as decreasing accounts receivable, inventories, and debt) and 5 Bearish results (not-so-good things such as ROE is deemed inadequate).  You can get this free, super-duper spreadsheet and a description of its many features by clicking here.

Here’s a table comparing the Consensus SSG to my two SSGs and to Take Stock.  The only judgment that’s different between Armin-1 and Armin-2 is my estimate of EPS growth. 

Danaher Corp          (DHR)	Consensus       SSG	Armin-1	Armin-2	Take              Stock
Date	5-5-09	5-8-09	Same	5-9-09
Data	S&P	Same	Same	Hemscott-
Price	$61.60	$61.38	Same	$61.38
52 week High &            Low Price	$85.00 &           $47.20	Same &         Same	Same &        Same	n/a
Project Growth From End of	Last               Quarter	Last               Quarter	Same	Last                     Fiscal Year
Sales Growth	5.00%	9.00%	Same	14.90%
EPS Growth	5.50%	8.00%	11.00%	06.10%
High PE	17.1	18.0	Same	23.0
High EPS	$5.30	$5.97	$6.84	$5.28
High Price	$90.60                 ($4.40/sh < VL’s low end est)	$107.50	$123.10	$121.37
Value Line Estimated High Price = $95-125 @ $54.42 on 4-24-09
Low PE	11.2                (lowest in last    5 years)	11.2           (Same)	Same	16.2
Low EPS	$3.47	$4.23	Same	$3.92
Low Price	$47.20          (recent severe low price)	$47.20        (recent severe low price)	Same	$63.50           (exceeds the current price)
Upside/Down	2.0	3.3	4.4	impossible to calculate
Total Return	8.2%	12.0%	15.1%	17.6%
SSG Buy Under	n/a	$53.78	$68.40	$61.22
RV/PRV (no outs)	77.6/73.4	77.0/71.4	Same/69.5	n/a
Quality	n/a	S&P = A+ (best)	Same	TS = 2.1(unacceptable)
PTPM – 5 yr ave	15.2%               trend even	Same &         Same	Same &       Same	14.9%                 trend n/a
ROE – 5 yr ave            with Ending Equity	14.9%             trend down	Same &        Same	Same &        Same	n/a
ROE – 5 yr ave            with Starting Equity	n/a	18.0%          trend down	Same &        Same	17.8%                 trend n/a
Debt to Equity –              5 yr ave	n/a	27.4%          trend down	Same &         Same	n/a

All 5 judgments by the Consensus SSG are discussed below so let me know, in the poll at the end,  if you think this post is too long.  The Consensus had a few surprises which are indicated in blue highlighting so they’re easier to spot.

CONSENSUS SSG:

Future Sales Growth:

– Gary gave the group four choices to estimate future Sales growth: 17.00% (last 10 year average), 15.00% (last 5 year average), 5.00% (Gary’s estimate), and 3.50% (VL’s estimate).  Another choice for all of the judgments was “None of the Above” which I won’t report.

 – Value Line’s 3.50% estimate was actually for Sales/Share as VL makes no estimate of Sales growth.  However, based on VL dollar estimates, we can imply a Sales growth rate of 1.83% (traditional method) to 3.81% (VL’s method).

 – Gary’s 5.00% estimate was based on YahooFinance’s Sales growth estimates for this year and next which he extended for another three years.

– The Consensus choice was 5.00%, Gary’s estimate.

Future EPS Growth:

– The group also was offered four choices to estimate DHR’s future EPS growth: 11.40% (YahooFinance’s long-term estimate for the next 5 years), 5.50% (VL’s estimate), 5.50% (from the Preferred Procedure), and 5.00% (Gary’s estimate).

– Gary did not check other long-term EPS estimates which I discuss under Armin’s SSG.

– The 5.50% Preferred Procedure estimate was based on: 5.00% Sales growth, 14.6% PTPM (down from the 5 year average of 15.2%), 21.0% Tax Rate (VL’s estimate), and 320 M Shares (VL’s estimate).  I stopped using the PP because it involves too many estimates and way too much guesswork; see Pondering the Preferred Procedure.

– Gary’s 5.00% EPS estimate was based on YahooFinance’s EPS growth estimates for this year and next which he extended for another three years.

 –  The Consensus choice was 5.00%, Gary’s estimate.  However, the Consensus SSG inexplicably uses 5.50%.

Forecast High PE:

– Four choices were offered to estimate the Forecast High PE: 22.8 (the 5 year historical average), 22.3 (the 3 year average), 20.9 (from 2008, the lowest High PE in the last 5 years), and 17.1 (based on a PEG of 1.5).

 – The 1.5 PEG was applied to 11.40% future EPS, based on YahooFinance’s estimate,

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which doesn’t seen right to me since the Consensus actually chose 5.00% for DHR’s future EPS.

– The Consensus chose 17.1, but Gary decided to use 20.9 instead , the lowest High PE in the last 5 years.

 Forecast Low PE:

– Four choices were also given to forecast the Low PE: 16.4 (the 5 year historical average), 15.3 (the 3 year average), 11.4 (PEG of 1.0), and 11.2 (from 2008, the lowest Low PE in the last 5 years).

– A 1.0 PEG was applied to 11.40% future EPS estimate from YahooFinance, but the Consensus actually chose 5.00% future EPS.

– The Consensus chose 11.2, the lowest Low PE in the last 5 years.

 Forecast Low Price:

– The fifth and last judgment was to select a Forecast Low Price from the four options offered by the Toolkit software: $28.90 (low PE x low EPS), $52.50 (average low price for the last 5 years), $47.20 (recent severe low), and $47.20 (price dividend will support).

– Gary lowered the low EPS from $4.23 to $3.47 based on YahooFinance’s EPS estimate for this year .

– The Consensus chose $47.20, the recent severe low which was the 52 week low when the SSG was completed on May 5, 2009.

– Whereas the Toolkit software offers four choices for the Forecast Low Price, BI’s Online SSG is much more limited and only offers one choice (low PE x low EPS).  It’s a good thing that Gary used his TK software.

SSG Results:

– As a consequence of these decisions, DHR was not a SSG Buy by the Consensus.  The $90.60 Forecast High Price was slightly below the low end of VL’s estimated $95-125 High Price; the 2.0 Upside/Downside Ratio was well under the 3.0 minimum needed to satisfy the Buy criteria; and the 8.00% Total Return was also well under the 15.00% minimum needed to Buy.

ARMIN’S SSGs:

Future EPS Growth:

– Value Line is currently estimating long-term EPS at 5.50% (down from 8.5%).  VL looks like a low-ball outlier compared to other analysts so I treated it as an outlier and disregarded its estimate.

 – Not only is VL out-of-whack with the other analyst estimates, its report also seems internally inconsistent as it does not expect any slowing of DHR’s acquisition activity, but does expect long-term EPS to drop to 5.50%.

– The five other analysts I always check were estimating long-term EPS at an average of 12.76% with Zacks.com high at 14.25%, and Reuters Thomson via Yahoo Finance low at 11.38%.  S&P was 12.50%, Reuters.com was 12.67%, and FactSet CallStreet via CNNMoney was 13.00%.

– Excel easily calculated that 11.73% was the Average less 1 Standard Deviation and 10.70% was the Average less 2 SDs.  I think reducing the average like this “wrings out” analyst over-optimism and results in a reasonably conservative estimate.

– Historical EPS growth using S&P data has been trending down for the last 6 years from 21.7% to 10.4% in 2008.  For the last three years, EPS growth has averaged 13.9%.

Danaher’s PTPM and ROE vs Industry:

– S&P places Danaher in the Industrial Machinery Industry and DHR is worse than its 5-year industry average in terms of Pre-Tax Profit Margin (15.2% vs 22.0%), but better in terms of Return on Equity (14.9% vs 7.1).

– Hemscott-Morningstar places DHR in the Conglomerate Industry and the company is worse than its 5-year industry average in terms of PTPM (14.9% vs 21.5%) and ROE (14.7% vs 24.2%).

– For more on industry info, which can be tricky, see Investigating Industry Info.

SSG Results:

– With 8.00% as the future EPS growth (Armin-1), my U/D was 3.3 but my TR was only 12.00% which did not satisfy the SSG Buy criteria of 15.00%.  Only when I increased future EPS growth to 11.00% (Armin-2) did my Total Return become 15.10%.

TAKE STOCK:

– Take Stock is a one-click computerized program at the StockCentral website that is designed to produce a conservative result with no judgment by the user.  TS produces an almost-SSG, everything but UD, and RV/PRV.

Forecast Low Price:

– Take Stock’s Low Price ($63.50) exceeds its current price ($61.38) which is permissible under TS, but is a SSG No-No according to the NAIC/BI SSG Handbook.

– TS has only one way to calculate the Low Price (low PE x low EPS) unlike the Toolkit software which offers four options.

– Even though TS doesn’t use the U/D, it can be calculated by hand, but only when the Low Price is below the current price.  Here, it is impossible to calculate and that makes comparisons impossible.

 [AF: An edited version of this Online Stock Study appears in the 10-09 issue of Better Investing magazine]

-Armin

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