By Sandra Ward
One of the best-run and top-performing U.S. companies can be
bought for less than its usual lofty premium as investors fret
about the slow pace of its merger activity and whether it is making
the best use of its capital.
In the past six months, shares of Danaher (DHR)--a Washington,
D.C.-based conglomerate whose interests span a wide swath of
industries including electronic measuring equipment, medical
diagnostic instruments, and water-treatment systems, among
others--have shown uncharacteristic weakness amid a slowdown in its
deal making, on which it depends heavily for growth.
High valuations for firms that Danaher might otherwise pursue
are preventing it from making deals at its customary pace as it
sticks to a strict price discipline.
The company, with $19 billion in annual revenue and a
stock-market value of $55 billion, is renowned across corporate
America for its Danaher Business System, a set of organizational
processes based on the Japanese principle of kaizen, or continuous
improvement.
Adding to concerns, longtime Chief Executive Lawrence "Larry"
Culp, 51 years old, surprised investors in mid-April by announcing
his retirement. The lengthy period before Mr. Culp's successor,
Thomas Joyce, 53 and a 25-year veteran of Danaher, takes the helm
in March 2015, prompted fresh worries that the company's M&A
strategy might be on an extended hiatus.
The shares, swept up in the broad market rally that has pushed
the S&P 500 to a record high, trade just below the 52-week
intraday high of $81.14 they hit June 9. Despite the run-up, the
stock represents good relative value.
Danaher trades at 21 times estimated 2014 earnings of $3.75 a
share and, on a price-to-earnings basis, commands half the 20%
premium it has been typically afforded versus its peers in the past
10 years. The shares trade at 19.5 times projected 2015 earnings of
$4.17, below the 20 times that has been more typical
historically.
On the basis of enterprise value to Ebitda (earnings before
interest, taxes, depreciation and amortization) as well as a price
to free cash flow, Danaher shares also trade at about half their
historical premium to a peer group that includes 3M, Dover and
Illinois Toolworks, among others.
"There is a lot of upside potential in Danaher," says James
Tarkenton, portfolio manager at Lateef Investment Management, a
money-management outfit overseeing $5.7 billion in assets based in
Greenbrae, Calif.
Danaher's potential lies in the more than $8 billion in surplus
cash it has available for deals that will drive earnings and free
cash flow higher. In weighing the best use of its capital, Danaher
typically favors mergers and acquisitions over stock buybacks or
dividends as a way to create value and achieve higher returns.
Stephen Tusa, an analyst at J.P. Morgan, says the stock could
climb to $95 a share based on improving fundamental growth and a
pickup in acquisition activity.
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