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Jonathan J. Smith

DHR AT A GLANCE

P/E ► 18.6 AVG EV/EBITDA ► 14.6 AVG ROA ► 7.1% AVG ROE ► 11.1% AVG Debt to Equity ► 0.709 LOW Current Ratio ► 1.94 AVG Interest Coverage Ratio ► 14.0 HIGH

 

 

 

 

 

 

Danaher Corporation (NYSE:DHR) produces high-tech equipment for a broad range of industries, from surgical microscopes to airline smoke detectors. In the conglomerates industry, DHR competes against Goliaths like General Electric Company (GE) and 3M Company (MMM).

As a conglomerate, DHR can apply its efficient manufacturing operations to many processes. Part of DHR's strategy is to acquire underperforming technology ventures and implement efficient manufacturing operations. In the past five years, DHR has achieved 14.5% compounded sales growth due to acquisitions, which made up 75% of total compounded sales growth.^[1] The acquisitions of Tektronix and Vision Systems has aided DHR's Professional Instrumentation and Medical Technologies, respectively. DHR's business strategy also consists of international expansion. Many economic experts, including Alan Greenspan, forecast a U.S. recession, so DHR wants to have less dependence on the U.S. economy. From 2003 to 2007, DHR's sales to global markets increased 12% and now comprise over 50% of total sales.^[1] In 2007, DHR generated $1 billion in sales to China alone. Like all manufacturing companies, DHR has had to respond to rising raw materials costs. From 2004 to 2008, scrap metal prices have grown from $75 per ton to over $550 per ton.^[2] From 2006 to 2007, however, DHR stabilized its operating margins (15.79% -- down from 15.84%) through higher pricing.^[3]

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Business Financials

Professional Instrumentation (32.1% of sales, 40.8% of operating profit)

The professional instrumentation segment sells environmental and measurement tools. These tools include calibration equipment, water quality instruments, and petroleum services. From 2006 to 2007, sales to professional instrumentation increased 21.7%.^[4]

Medical Technologies (27.2% of sales, 22.6% of operating profit)

The medical technologies segment manufactures dental, microscopy, and life sciences equipment. Products range from infection control products to surgical microscopes. DHR sells these products to professionals and health care institutions. From 2006 to 2007, sales to medical technologies increased 35%.^[4]

Industrial Technologies (28.6% of sales, 30.6% of operating profit)

The industrial technologies segment manufactures production and packaging line products as well as aerospace & defense products. Industrial products range from motors to brakes and aerospace & defense products range from security systems to smoke detectors. From 2006 to 2007, sales to industrial technologies increased 5.5%.^[4]

Tools & Components (12.1% of sales, 10.1% of operating profit)

The Tools & Components segment manufactures tools and industrial parts. Products range from hand tools to gear boxes to automotive tools, with brands including Matco and Sears Craftsman. These products are sold at hardware stores and to automotive end markets. From 2006 to 2007, sales to tools & components decreased 1.1%.^[4] due to a declining automotive industry.

From 2006 to 2007, DHR revenues increased 16.5%, total cost increased 16.6%, and operating profit increased 16.0%.^[4] In 2007, DHR had backlog of $1.7 billion, up 39.2% from the previous year.^[5] DHR's prosperity has been primarily due to acquisitions.

Trends and Forces

Acquisitions

Part of DHR's business strategy is to acquire poorly-run companies and manage them with more efficient operations. In the past five years, DHR has achieved 14.5% compounded sales growth due to acquisitions, which is 75% of the total compounded sales growth.^[1]

Danaher acquires Tektronix (TEK) for $2.8 billion.

On October 15, 2007, DHR acquired Tektronix (TEK) for $2.8 billion.^[6] TEK is the market leader in manufacturing high precision oscilliscopes used in telecom networking. TEK is an electronic testing company that will expand DHR's product line. TEK is projected to add $1.2 billion in sales for 2008.^[1]

Danaher acquires Vision Systems for $519 million.

On October 9th, 2006, Danaher acquired Vision Systems for $519 million.^[7] Vision Systems provides visual instrumentation for the medical field. The acquisition of Vision Systems increased revenues to the Medical Technologies segment by 35%.

DHR expands internationally in response to declining U.S. economy.

According to former Federal Reserve Chairman Alan Greenspan, the likelihood that the U.S. is entering a recession is "50% or better."^[8] A warning sign of a recession is that the value of the dollar has declined in the past decade. From 2006 to 2007 alone, the Euro/Dollar exchange rate increased 14%.^[9] DHR reasons that consumers will buy less because of the potential recession, so the company wants to become less dependent on the U.S. economy.^[1]

Danaher has turned this negative into a positive by expanding to emerging international markets. From 2003 to 2007, DHR's sales to global markets increased 12% and now comprises over 50% of total sales.^[1] DHR operates over 100 manufacturing facilities in over 20 countries, with sales to over 125 countries.^[1] The company has had a strong presence in China -- the world's leading emerging market. China's gross domestic product increased 11.3% in 2007.^[10]. Comparatively, the U.S. gross domestic product increased 2.2% in 2007.^[11] In 2007, Danaher had $1 billion in sales to China.^[1]

Rising steel, oil and non-ferrous metals prices.

Steel is DHR's principle material used in manufacturing. From 2004 to 2008, scrap metal price has grown from $75 per ton to over $550 per ton.^[12] DHR also uses oil and gas in manufacturing and transportation. Oil prices have increased 35% since the end of 2007.^[13] From 2006 to 2007, DHR stabilized its operating margins (15.79% -- down from 15.84%) through pricing.^[14]

Competition

Conglomerates

• Danaher (DHR) DHR manufactures products ranging from surgical microscopes to smoke detectors. In 2007, 51% of DHR's sales were international.^[1]
• General Electric Company (GE) GE leads the conglomerate industry in market cap and total revenue.^[15]
• United Technologies (UTX) UTX is second in the conglomerate industry in market cap and total revenue.^[15]
• 3M Company (MMM) -- 3M manufactures everything from LCD screens to post-it notes. Two-thirds of 3M sales are international.^[16]
• Textron (TXT) -- TXT manufactures automotive and aerospace & defense products, as well as provides commercial loans.^[17]
• PPG Industries (PPG) PPG lead the conglomerate industry in quarterly revenue growth ^[15]
• Cooper Industries (CBE) -- CBE manufactures electrical products, tools, hardware, and metal support products.^[18]
• Crane Company (CR) CR lead the conglomerate industry in quarterly earnings growth.^[15]

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8} DHR 2007 Annual Report
2. ↑ Forbes, "Timken Steeled by Steel," 4/30/08
3. ↑ Google Finance: DHR
4. ↑ ^{4.0 4.1 4.2 4.3 4.4 4.5} DHR 2007 10-k, Item 6: Selected Financial Data, page 25
5. ↑ DHR 2007 10-k, Item 1: Business, page 10
6. ↑ Seeking Alpha, "Danaher to Buy Tektronix for 2.8B -- WSJ," 10/15/07
7. ↑ Goliath, "DANAHER CORP SET TO ACQUIRE VISION SYSTEMS FOR $US519MLN," 10/09/06
8. ↑ CNN Money, "Greenspan: Recession chances '50% or better,' 02/15/08
9. ↑ Yahoo! Finance: Euro to U.S. Dollar Exchange Rate
10. ↑ China View, "China targets 8% GDP Growth in 2008," 03/05/08
11. ↑ About.com, "National Income and Products Accounts Table"
12. ↑ Forbes, "Timken Steeled by Steel," 4/30/08
13. ↑ Wikipedia, "Oil Price Increases Since 2003"
14. ↑ Google Finance: DHR
15. ↑ ^{15.0 15.1 15.2 15.3} Yahoo! Finance: Conglomerates Leaders and Laggards
16. ↑ 3M website, "About Us"
17. ↑ Textron website, "Textron Businesses"
18. ↑ Cooper Industries website, "About Cooper Industries"
19. ↑ GE 2007 10-k, Item 6: Selected Financial Data, page 21
20. ↑ UTX 2007 10-k, Item 6: Selected Financial Data, page 14
21. ↑ [http://www.sec.gov/Archives/edgar/data/66740/000110465908011226/a08-2453_110k.htm#Item6_SelectedFinancialData__190640 MMM 2007 10-k, Item 6: Selected Financial Data, page 11}
22. ↑ TXT 2007 10-k, Item 6: Selected Financial Data, page 14
23. ↑ PPG 2007 10-k, Item 6: Selected Financial Data, page 19
24. ↑ CBE 2007 10-k, Item 6: Selected Financial Data, page 16
25. ↑ CR 2007 10-k, Item 6: Selected Financial Data, page 17