DHR - Danaher

[Liberty]

This company has been discussed elsewhere (the Colfax thread, among other places), but it think it deserves its own thread so discussions aren't scattered all over and lost in the archive.

 

Today's bit of news is about their CEO transition next year:

 

Danaher today announced that Executive Vice President Thomas P. Joyce, Jr. will succeed H. Lawrence Culp, Jr. as President and Chief Executive Officer upon Mr. Culp's retirement on March 1, 2015.  Mr. Culp will continue at Danaher in an advisory role into the first quarter of 2016.

 

Steven M. Rales, Chairman of the Danaher Board of Directors, stated, "This announced transition comes at a time of strength at Danaher given our attractive portfolio of businesses, excellent management team, strong balance sheet and culture of the Danaher Business System.  The selection of Tom to succeed Larry next year reflects the culmination of our succession planning process. Tom has a demonstrated track record of success in a wide range of positions at Danaher over the past 25 years, and he is well qualified to lead our continued growth and development.  The Board believes Tom is the ideal candidate to become just the fourth CEO in the Company's 30-year history."

 

Mr. Rales continued, "Larry's leadership during the last 13 years as CEO has been extraordinary.  During Larry's tenure, Danaher's revenues and market capitalization have increased approximately five-fold to nearly $20 billion and $50 billion, respectively, while at the same time driving shareholder returns five times that of the S&P500 Index.  He has been instrumental in reshaping the portfolio and positioning us today as a leading global science and technology company.  We have greatly expanded our global reach with particular emphasis in the high growth markets, increasing our sales in these markets ten-fold to $5 billion under Larry's leadership.  In addition, Larry has played a central role in enhancing the Danaher Business System and building a deep and talented management team." 

[Dustin T]

When I found CofB&F I was surprised there wasn't a DHR thread. Thanks for starting one.

 

I just read the CC transcript and while I hate to see the Lawrence Culp retire it sounds like he is doing it for the right reasons and that the company will likely be in good hands going forward. A CEO retiring always makes me a little nervous, I believe human nature makes them more likely to stay when the future is bright and encourages them to retire when the outlook is dim.

 

It's probably not an exciting time to manage DHR valuations are generally high and things have been slow on the acquisition front, I certainly hope to add to my position if the market sours and DHR finds attractively priced bolt on additions plentiful again.

[accutronman]

The latest from MS:

 

Following recent weakness, we are now able to buy

one of the highest quality industrials at a sector

multiple, with a free option on effective capital

deployment worth around $14. While we are sorry to

see CEO Culp step down, we believe the DHR

outgrowth story will carry on.

 

Almost lost among news was a solid quarter, with 81c

EPS - a penny above MSe, driven by Dental and Industrial

Tech, while adverse 1Q weather was a top-line and margin

headwind at LS&D, as expected. We continue to see a

steady cadence of 3-4% organic growth for the balance of

the year, which continues to point us towards the upper end

of the $3.60-3.75 guidance range.

 

We are bumping our target price to $84, largely as a

result of rolling forward our estimates. Clearly, the debate

continues to center on the ability to productively deploy

surplus ($8-10bn) capital and whether the CEO transition is

an incremental risk to the “Different Danaher” story.

However, DHR is now trading at rare absolute value on all

metrics, meaning that capital deployment is a free but

valuable option worth about $14/share. Reiterate OW

[Liberty]

http://online.barrons.com/news/articles/SB50001424053111904651304579599960752903986

 

(If you search for the title of the piece in Google, you'll get the whole thing)

[siddharth18]

^^ or just click this link: https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CB8QFjAA&url=http%3A%2F%2Fonline.barrons.com%2Fnews%2Farticles%2FSB50001424053111904651304579599960752903986&ei=UqKgU9WEOu7LsATWuoC4Cw&usg=AFQjCNFimbTvDp6DLdXO0b4f4qgDU3-Bnw&sig2=khqxOhpwqAtTK0OA5SY8XA&bvm=bv.68911936,d.cWc

[Dustin T]

From the article,

 

 

"In the past six months, Danaher shares (ticker: DHR) have shown uncharacteristic weakness as investors fretted about the slowing pace of its deal-making and worried that the company wasn't using its capital efficiently. In 2013, Danaher spent almost $1 billion on 14 acquisitions; in the first quarter of 2014, it completed just five deals for $165 million. That's well below its average of $2 billion in purchases a year, with an average deal size of $150 million, according to JPMorgan Chase analyst Stephen Tusa. The last big deal came in 2011 when it paid $6.8 billion for Beckman Coulter, which makes medical-testing equipment."

 

 

The above to me is just pure "Mr. Market". Much of Danaher's growth comes through acquisitions but that they are willing to wait for them at an appropriate price is a sign of rationality. In the next recession I expect the capital will be deployed on much more favorable terms then would be available now and they will see renewed growth. The fact that they are not buying simply renews my faith in the management at Danaher.

[fareastwarriors]

Danaher Investors Look for Deals as $12 Billion Idles

 

 

http://www.bloomberg.com/news/2014-06-19/danaher-s-12-billion-deal-engine-is-idling-real-m-a.html

[Liberty]

http://dealbook.nytimes.com/2014/09/15/danaher-agrees-to-acquire-swiss-dental-implant-maker/

 

The Danaher Corporation, an American science and technology conglomerate, said on Monday that it had agreed to acquire Nobel Biocare Holding in a deal that values the company, a Swiss dental implant maker, at about $2.2 billion

[Dustin T]

http://dealbook.nytimes.com/2014/09/15/danaher-agrees-to-acquire-swiss-dental-implant-maker/

 

The Danaher Corporation, an American science and technology conglomerate, said on Monday that it had agreed to acquire Nobel Biocare Holding in a deal that values the company, a Swiss dental implant maker, at about $2.2 billion

 

I'll be watching this one closely, it's a large addition and the first since the new CEO took over.

[CorpRaider]

http://www.bloomberg.com/news/2014-10-13/netscout-to-buy-danaher-unit-for-2-6-billion.html?cmpid=yhoo

 

Looks like there will either be a spin of split off of the communications business to DHR shareholders.

[Dustin T]

Big changes for Danaher. They are acquiring Pall corp and splitting into two companies.

 

"The transaction will create a science and technology company that will include Pall and retain the Danaher name (generated approximately $16.5B in 2015 revenues including Pall).

 

The second company will be a diversified industrial growth business (generated approximately $6B in 2015 revenues)."

 

http://finance.yahoo.com/news/danaher-announces-intention-separate-two-113100232.html

[LongHaul]

I thought Danaher was supposed to be good at acquisitions?  Looks like they are buying Pall for ~34x forward P/E (with non-economic amortization added back to my earnings).  I think they paid about double what Pall was worth.  Pretty apPALLing!  Thoughts?

[cayale]

I thought Danaher was supposed to be good at acquisitions?  Looks like they are buying Pall for ~34x forward P/E (with non-economic amortization added back to my earnings).  I think they paid about double what Pall was worth.  Pretty apPALLing!  Thoughts?

 

Thoughts?  I admire your punmanship.

[Jurgis]

Buy/split is a head scratcher. I'll just pun-t that it's too expensive and put it into "too hard" pile.

[Dustin T]

I thought Danaher was supposed to be good at acquisitions?  Looks like they are buying Pall for ~34x forward P/E (with non-economic amortization added back to my earnings).  I think they paid about double what Pall was worth.  Pretty apPALLing!  Thoughts?

 

I think they paid too much, and fear they will get a PALLTry return on this investment.

 

They've improved margins by 10% on acquisitions before and they'll have to on this one to turn it into an average investment.

 

I wished they had waited on a fatter pitch.

[rogermunibond]

Combining PALL with DHR filtration assets creates a market leader in waste water treatment.  Given climate trends and drought in major parts of the country, the multiple on this spinoff might be higher than they paid for PALL.  I think this is just a way for them to get ahead of what they see as a major business opportunity.

[Liberty]

Piece on Danaher and the Rales:

 

http://www.washingtonpost.com/business/billionaire-rales-brothers-ready-for-a-new-act-in-split-of-danaher-corp/2015/05/21/3f424d2a-fe81-11e4-805c-c3f407e5a9e9_story.html

 

I had no idea Steven Rales helped fund Wes Anderson films. Grand Budapest Hotel is a favorite of mine.

[netnet]

Any thoughts on the split?

[mrholty]

My day job is working for a competitor of a major part of what will be in Danaher's industrial side.  They are the #1 gorilla in the marketplace and they wild the power very successfully.  Some of their clients/distributors have a love/hate relationship with them which is how we have grown at a few % points faster clip than then but I'm not discounting them.  They absolutely are not the weakest competitor and by all accounts are still a lean company.  They are aggressive in cost cutting and work very hard to source their products in the local markets yet they do it in a controlled manner.  I can go to Alibaba and see a bunch of our competitors products being sold by whomever they are contract manufacturing with.  However I don't see any of their equipment meaning they probably do final assembly in house at a slightly higher cost but a better decision long term. 

 

A year ago they had a problem where they had an item that they were having problems with due to quality.  They are the market leader in this specific line with 70% market share and we had probably 20% over the last 5 years.  The product line probably is a $10M annual sales line.  They could have tried to sell this product with its flaws and kept share but had high returns (as the motor would fail at 6-9 months) which should give them time to get a replacement ready.  They didn't - they pulled the line - we had 90% share for 12-15 months and now they are back with a vengeance with a damn more efficient design and they are taking lower margins right now to win share.  The market is now probably split 50/50 with us now and going forward.  Now this may seem stupid but to their customers it reinforced the idea of their focus on quality over everything else.  This is a $5M swing in a $6B conglomerate yet they didn't lose focus. 

 

Put it this way.  I own my companies stock in my 401k because I get a discount.  I own them in my IRA.

 

Regarding PALL.  I'm guessing that they see a ton of syneriges.  Our experience with them is they are efficient and calculating.  We went head to head with them with a company they acquired last year and we lost to them.  The seller wanted to sell to us due to some locational preference but our bid was much lower due to the product involved.  This was a natural extension for them in a product where they dominate but a submarket where they were vunerable.  to us it was a beachhead to a entirely new division.  For lots of companies we could have overpaid.  We didn't but neither did they. 

[Guest ajc]

 

 

My day job is working for a competitor of a major part of what will be in Danaher's industrial side.  They are the #1 gorilla in the marketplace and they wild the power very successfully.  Some of their clients/distributors have a love/hate relationship with them which is how we have grown at a few % points faster clip than then but I'm not discounting them.  They absolutely are not the weakest competitor and by all accounts are still a lean company.  They are aggressive in cost cutting and work very hard to source their products in the local markets yet they do it in a controlled manner.  I can go to Alibaba and see a bunch of our competitors products being sold by whomever they are contract manufacturing with.  However I don't see any of their equipment meaning they probably do final assembly in house at a slightly higher cost but a better decision long term. 

 

A year ago they had a problem where they had an item that they were having problems with due to quality.  They are the market leader in this specific line with 70% market share and we had probably 20% over the last 5 years.  The product line probably is a $10M annual sales line.  They could have tried to sell this product with its flaws and kept share but had high returns (as the motor would fail at 6-9 months) which should give them time to get a replacement ready.  They didn't - they pulled the line - we had 90% share for 12-15 months and now they are back with a vengeance with a damn more efficient design and they are taking lower margins right now to win share.  The market is now probably split 50/50 with us now and going forward.  Now this may seem stupid but to their customers it reinforced the idea of their focus on quality over everything else.  This is a $5M swing in a $6B conglomerate yet they didn't lose focus. 

 

Put it this way.  I own my companies stock in my 401k because I get a discount.  I own them in my IRA.

 

Regarding PALL.  I'm guessing that they see a ton of syneriges.  Our experience with them is they are efficient and calculating.  We went head to head with them with a company they acquired last year and we lost to them.  The seller wanted to sell to us due to some locational preference but our bid was much lower due to the product involved.  This was a natural extension for them in a product where they dominate but a submarket where they were vunerable.  to us it was a beachhead to a entirely new division.  For lots of companies we could have overpaid.  We didn't but neither did they.

 

 

Great post. Insights like these are sometimes worth pages of the more standard to and fro.

 

 

 

[Liberty]

My day job is working for a competitor of a major part of what will be in Danaher's industrial side.  They are the #1 gorilla in the marketplace and they wild the power very successfully.  Some of their clients/distributors have a love/hate relationship with them which is how we have grown at a few % points faster clip than then but I'm not discounting them.  They absolutely are not the weakest competitor and by all accounts are still a lean company.  They are aggressive in cost cutting and work very hard to source their products in the local markets yet they do it in a controlled manner.  I can go to Alibaba and see a bunch of our competitors products being sold by whomever they are contract manufacturing with.  However I don't see any of their equipment meaning they probably do final assembly in house at a slightly higher cost but a better decision long term. 

 

A year ago they had a problem where they had an item that they were having problems with due to quality.  They are the market leader in this specific line with 70% market share and we had probably 20% over the last 5 years.  The product line probably is a $10M annual sales line.  They could have tried to sell this product with its flaws and kept share but had high returns (as the motor would fail at 6-9 months) which should give them time to get a replacement ready.  They didn't - they pulled the line - we had 90% share for 12-15 months and now they are back with a vengeance with a damn more efficient design and they are taking lower margins right now to win share.  The market is now probably split 50/50 with us now and going forward.  Now this may seem stupid but to their customers it reinforced the idea of their focus on quality over everything else.  This is a $5M swing in a $6B conglomerate yet they didn't lose focus. 

 

Put it this way.  I own my companies stock in my 401k because I get a discount.  I own them in my IRA.

 

Regarding PALL.  I'm guessing that they see a ton of syneriges.  Our experience with them is they are efficient and calculating.  We went head to head with them with a company they acquired last year and we lost to them.  The seller wanted to sell to us due to some locational preference but our bid was much lower due to the product involved.  This was a natural extension for them in a product where they dominate but a submarket where they were vunerable.  to us it was a beachhead to a entirely new division.  For lots of companies we could have overpaid.  We didn't but neither did they.

 

Thanks for sharing, mrholty!

[james22]

Better Than The Berkshire Hathaway?

 

•Danaher has outperformed Berkshire over the past quarter century.

•Today, it is undervalued by around 23%.

•A complex series of deals are hiding its intrinsic value.

 

http://seekingalpha.com/article/3319095-better-than-the-berkshire-hathaway-danahers-value

[Guest longinvestor]

Better Than The Berkshire Hathaway?

 

•Danaher has outperformed Berkshire over the past quarter century.

•Today, it is undervalued by around 23%.

•A complex series of deals are hiding its intrinsic value.

 

http://seekingalpha.com/article/3319095-better-than-the-berkshire-hathaway-danahers-value

 

Disclosure: I worked for DHR for about half of the past quarter century.

 

The 3 bullets capture the paradox of the comparison between DHR and BRK. The outperformance is perhaps something many people out there don't simply know. Not only BRK, I don't think there are (m)any others, in the same time period (1989-2014) that have outperformed.

 

So, what's the paradox?

 

Both DHR and BRK buy companies, but how? With a rare exception, BRK buys with cash, seldom issuing shares. Buffett has written enuff about that subject. DHR, on the other hand is a serial acquirer using their stock as currency.

 

Here is a short paragraph from Buffett's letter this year, in the context of conglomerates being in the dog-house, Once again it became evident that business models based on serial issuance of overpriced shares - just like the chain letter models - most assuredly redistribute wealth, but in no way create it

 

That, IMO, captures DHR's acquisition-fueled growth. I will leave the accounting treatment of wealth creation (or lack of) to experts, that's not me. Complex? You bet. Can't even imagine how murky the PALL+DHR and then DHR1+DHR2 is going to look on the finances. 

 

The rest of the seeking alpha article is spot on. No other comparable corporation has an execution model like DHR's. Specifically the Danaher Business System. Companies salivate for it. For ex-DHR folks like me, we will take those valuable lessons to our grave. Yet, when I left, I separated the business from the stock. I sleep well thanks to that. 

 

Disclosure: I have ZERO $ in DHR and approaching 100% in BRK.

 

[Liberty]

Better Than The Berkshire Hathaway?

 

•Danaher has outperformed Berkshire over the past quarter century.

•Today, it is undervalued by around 23%.

•A complex series of deals are hiding its intrinsic value.

 

http://seekingalpha.com/article/3319095-better-than-the-berkshire-hathaway-danahers-value

 

Disclosure: I worked for DHR for about half of the past quarter century.

 

The 3 bullets capture the paradox of the comparison between DHR and BRK. The outperformance is perhaps something many people out there don't simply know. Not only BRK, I don't think there are (m)any others, in the same time period (1989-2014) that have outperformed.

 

So, what's the paradox?

 

Both DHR and BRK buy companies, but how? With a rare exception, BRK buys with cash, seldom issuing shares. Buffett has written enuff about that subject. DHR, on the other hand is a serial acquirer using their stock as currency.

 

Here is a short paragraph from Buffett's letter this year, in the context of conglomerates being in the dog-house, Once again it became evident that business models based on serial issuance of overpriced shares - just like the chain letter models - most assuredly redistribute wealth, but in no way create it

 

That, IMO, captures DHR's acquisition-fueled growth. I will leave the accounting treatment of wealth creation (or lack of) to experts, that's not me. Complex? You bet. Can't even imagine how murky the PALL+DHR and then DHR1+DHR2 is going to look on the finances. 

 

The rest of the seeking alpha article is spot on. No other comparable corporation has an execution model like DHR's. Specifically the Danaher Business System. Companies salivate for it. For ex-DHR folks like me, we will take those valuable lessons to our grave. Yet, when I left, I separated the business from the stock. I sleep well thanks to that. 

 

Disclosure: I have ZERO $ in DHR and approaching 100% in BRK.

 

Thanks for sharing your thoughts, very interesting!

 

I liked the twist in your comment; it started out and I was expecting you to be very bullish on DHR, but then you don't own the stock at all (which is different from owning more BRK or whatever). Can you elaborate a bit more about why you don't want to own it at all? You find it good but overvalued? You don't know if they can keep producing similar results going forward (because of size? management change?)? You find their deals and spinoffs too complex for comfort? Curious to hear more of your thinking on this. Thanks in advance.

[CorpRaider]

I thought the consideration in the PALL deal was cash and further, that was the DHR modus operandi.  Nobel was also another recent, huge cash acquisition, if memory serves.  I think that has also been the case with CFX.

 

I wasn't overly impressed with the whole 1980 kaizen thing but wow you read and hear some stuff about how bad industrial managements are without some controlling shareholder with a hand on the wheel.  Did anyone catch the NPR story about the guys who tried to fix GM's "crappy car" problem prior to bankruptcy?  I think its on this american life.  Pretty interesting.