DHR - Danaher

[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.

 

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.

 

Too hard. Not worth losing sleep.

 

Here are some numbers and risk statements from the 10-K

 

Goodwill+intangibles=$24.3 B

Stockholders equity=$23.4 B

 

We may be required to recognize impairment charges for our goodwill and other intangible assets.

As of December 31, 2014, the net carrying value of our goodwill and other intangible assets totaled approximately $24.3

billion. In accordance with generally accepted accounting principles, we periodically assess these assets to determine if they

are impaired. Significant negative industry or economic trends, disruptions to our business, inability to effectively integrate

acquired businesses, unexpected significant changes or planned changes in use of our assets, changes in the structure of our

business, divestitures, market capitalization declines, or increases in associated discount rates may impair our goodwill and

other intangible assets. Any charges relating to such impairments would adversely affect our results of operations in the

periods recognized.

 

Acquired Intangibles: The Company’s business acquisitions typically result in the recognition of goodwill, in-process research

and development and other intangible assets, which affect the amount of future period amortization expense and possible

impairment charges that the Company may incur. Refer to Notes 1, 2 and 6 in the Company’s consolidated financial statements

for a description of the Company’s policies relating to goodwill, acquired intangibles and acquisitions.

In performing its goodwill impairment testing, the Company estimates the fair value of its reporting units primarily using a

market based approach. The Company estimates fair value based on multiples of earnings before interest, taxes, depreciation

and amortization (“EBITDA”) determined by current trading market multiples of earnings for companies operating in

businesses similar to each of the Company’s reporting units, in addition to recent market available sale transactions of

comparable businesses. In evaluating the estimates derived by the market based approach, management makes judgments

about the relevance and reliability of the multiples by considering factors unique to its reporting units, including operating

results, business plans, economic projections, anticipated future cash flows, and transactions and marketplace data as well as

judgments about the comparability of the market proxies selected. In certain circumstances the Company also estimates fair

value utilizing a discounted cash flow analysis (i.e., an income approach) in order to validate the results of the market

approach. The discounted cash flow model requires judgmental assumptions about projected revenue growth, future operating

margins, discount rates and terminal values. There are inherent uncertainties related to these assumptions and management’s

judgment in applying them to the analysis of goodwill impairment.

As of December 31, 2014, the Company had twenty-two reporting units for goodwill impairment testing. Reporting units

resulting from recent acquisitions generally present the highest risk of impairment. Management believes the impairment risk

associated with these reporting units decreases as these businesses are integrated into the Company and better positioned for

potential future earnings growth. The carrying value of the goodwill included in each individual reporting unit ranges from $7

million to $4.3 billion. The Company’s annual goodwill impairment analysis in 2014 indicated that in all instances, the fair

values of the Company’s reporting units exceeded their carrying values and consequently did not result in an impairment

charge. The excess of the estimated fair value over carrying value (expressed as a percentage of carrying value for the

respective reporting unit) for each of the Company’s reporting units as of the annual testing date ranged from approximately

10% to approximately 1140%. In order to evaluate the sensitivity of the fair value calculations used in the goodwill impairment

test, the Company applied a hypothetical 10% decrease to the fair values of each reporting unit and compared those values to

the reporting unit carrying values. Based on this hypothetical 10% decrease, the excess of the estimated fair value over

carrying value (expressed as a percentage of carrying value for the respective reporting unit) for each of the Company’s

reporting units ranged from approximately 2% to approximately 1015%.

The Company reviews identified intangible assets for impairment whenever events or changes in circumstances indicate that

the related carrying amounts may not be recoverable. The Company also tests intangible assets with indefinite lives at least

annually for impairment. Determining whether an impairment loss occurred requires a comparison of the carrying amount to

the sum of undiscounted cash flows expected to be generated by the asset. These analyses require management to make

judgments and estimates about future revenues, expenses, market conditions and discount rates related to these assets.

If actual results are not consistent with management’s estimates and assumptions, goodwill and other intangible assets may be

overstated and a charge would need to be taken against net earnings which would adversely affect the Company’s financial

statements.

[Liberty]

Q3 is out: http://investors.danaher.com/2016-10-20-Danaher-Reports-Third-Quarter-2016-Results

[DavidVY]

They own nobel biocare which is a longstanding dental implant company. They also own gendex imaging which does sensors and X-ray units

 

They have great customer support which accounts for a lot of their positive customer interaction but their prices are significantly higher than competitors.

 

A bunch of their patents on implant designs are rolling back so generic's are coming unto the market. ImplantDirect which is competitor of NobelBiocare releases a generic version of implant that is identical match to Nobelbiocare expired line at 1/3 the retail price (1/2 price of Nobel biocare bulk price). They also release generic parts at heavily reduced prices compared to Nobel.

 

I come from the dental side and am v familiar w/the market. Its very saturated and I think price points have only one way to go (down).

 

 

[scorpioncapital]

Yes I read that deconstructing CPI over the decades, dental has gone up one of the highest, on the same scale as housing. I love it when the CPI components with the most egregious inflation are targeted by companies for deflation.

 

Does this mean we should invest in those industries where deflation has been intense on the theory it will go up and dis-invest in the fastest growing CPI components on the theory people desire to reduce those costs and will succeed?

[Liberty]

Q2:

 

http://investors.danaher.com/2017-07-20-Danaher-Reports-Second-Quarter-2017-Results

 

 

[Liberty]

"Danaher Announces Plan To Spin Off Dental Business Into An Independent, Publicly Traded Company"

 

https://www.prnewswire.com/news-releases/danaher-announces-plan-to-spin-off-dental-business-into-an-independent-publicly-traded-company-300683463.html

[villainx]

"Danaher Announces Plan To Spin Off Dental Business Into An Independent, Publicly Traded Company"

 

https://www.prnewswire.com/news-releases/danaher-announces-plan-to-spin-off-dental-business-into-an-independent-publicly-traded-company-300683463.html

 

Any thoughts on dental biz?  Spin is suppose to happen next year.  When they spun off FTV, I read that dental was an odd fit to stay within DHR, so this isn't a surprise. 

[LC]

Old topic but I found this review on a mechanics/woodworking forum:

 

 

Jacobs, like many other good old school brand names in tools, was has been bought and sold by MBAs only interested in their quarterly reports and related bonuses having no interest whatsoever in the actual business itself. The current owner is a holding company called Danaher, which seems to be among the worst with regard to tool name brands. The general theme is to buy an old well known US company that was still known for good quality tools, but struggling to stay competitive with the ever expanding crop of uneducated (in spite of college degrees) and unskilled US (and Europe) consumers interested only in lowest price to the exclusion of all else. They sell off all (or almost all) existing assets and fire everyone with the possible exception of some senior management that negotiate (usually to the detriment of others, first hand experience on that) a position for themselves in the purchasing company. Manufacturing is then moved to the cheapest third world option, producing what amount to legal brand stamped look-alike clones (called "leveraging the brand"), and then sold at only a slight reduction (or often not any at all) for what is no longer even marginally the same quality tool/part. The same thing happened to Stanley, B&S and many others. I've read about and know first hand folks who bought brand new Jacob's Super Chucks that were such visibly poor quality straight out of the box that they were returned without even being worth mounting. Others that were mounted and performed so terribly that they were deemed unusable. I've got a brand new set of B&S adjustable parallels that was so bad that they were given to me. Borderline unusable, nowhere near the quality of the quite old Starrett set I've since acquired. And I've got a set of very old B&S adjustable bore parallels that are absolutely perfect, nothing like the trash they sold in the last decade (or whatever).

[Guest longinvestor]

Old topic but I found this review on a mechanics/woodworking forum:

 

 

Jacobs, like many other good old school brand names in tools, was has been bought and sold by MBAs only interested in their quarterly reports and related bonuses having no interest whatsoever in the actual business itself. The current owner is a holding company called Danaher, which seems to be among the worst with regard to tool name brands. The general theme is to buy an old well known US company that was still known for good quality tools, but struggling to stay competitive with the ever expanding crop of uneducated (in spite of college degrees) and unskilled US (and Europe) consumers interested only in lowest price to the exclusion of all else. They sell off all (or almost all) existing assets and fire everyone with the possible exception of some senior management that negotiate (usually to the detriment of others, first hand experience on that) a position for themselves in the purchasing company. Manufacturing is then moved to the cheapest third world option, producing what amount to legal brand stamped look-alike clones (called "leveraging the brand"), and then sold at only a slight reduction (or often not any at all) for what is no longer even marginally the same quality tool/part. The same thing happened to Stanley, B&S and many others. I've read about and know first hand folks who bought brand new Jacob's Super Chucks that were such visibly poor quality straight out of the box that they were returned without even being worth mounting. Others that were mounted and performed so terribly that they were deemed unusable. I've got a brand new set of B&S adjustable parallels that was so bad that they were given to me. Borderline unusable, nowhere near the quality of the quite old Starrett set I've since acquired. And I've got a set of very old B&S adjustable bore parallels that are absolutely perfect, nothing like the trash they sold in the last decade (or whatever).

 

It’s true but convenient to pin it on the likes of DHR the consumerism that has dominated since the 1980’s. In one word what happened to brands like Jacobs, Dewalt et al is Home Depot, Lowes etc. Brands were far more nurtured pre-big box retail. And oh btw, disposable income available for discretionary things like power tools has gone down steadily as well. Why Home Depot exists in the first place.

[LC]

That is all very true. I am just posting so investors realize (1) what the company is doing and selling, and (2) who their target customer is.

 

Many times investors are blinded by all the "platform" nonsense and think they are buying a high value company, when it may not be the case.

 

I'm not judging the business model (I personally wouldn't buy their tools for another other than a one-off job), just trying to make sure people know exactly what they're investing into.

[wisowis]

https://www.businesswire.com/news/home/20190225005490/en/GE-Sell-BioPharma-Business-Danaher-21.4-Billion

[scorpioncapital]

This is my 2nd largest holding after Berkshire but the enthusiasm seems excessive?

0.5/share in year 1 rising to $1 in year 5...Add it to say $4.75 of fcf and you get $5.75 in 5 years and you pay 20 billion, with some significant debt, so interest cost will rise. Let's say $5.5? Growth? If averages 5% it's $7 in 5 years, minus debt cost say $6.5/share? or 18.5x fcf/cash flow at 120 since fcf ~ earnings for DHR...Not crazy if rates stay around where they are now.

[Broeb22]

My guess would be investors think all GE businesses have lots of fat, so there are cost-cutting opportunities for DHR here?

 

I can't say paying 17x forward EBITDA screams cheap, but I think the market believes DHR wouldn't pay this much if there were a lot more than $100 million synergies.

 

An interesting side company to look at is Repligen. Repligen supplies GE Healthcare and I'm not sure if they supply the BioPharma unit DHR is buying or not but GE's name is littered throughout that 10-K. Not sure DHR would buy Repligen to vertically integrate or not. I honestly don't understand the technology well enough there.

[Liberty]

Does it feel weird to anyone else that Culp is selling a huge asset to his old company? Does Culp still own all his DHR shares? Seems like a conflict...

[gfp]

Yeah that was my first thought - Culp selling a major sub to Danaher??  I haven't checked if he still owns DHR shares.  Obviously it will have to pass muster with the board.

 

Does it feel weird to anyone else that Culp is selling a huge asset to his old company? Does Culp still own all his DHR shares? Seems like a conflict...

[walkie518]

Yeah that was my first thought - Culp selling a major sub to Danaher??  I haven't checked if he still owns DHR shares.  Obviously it will have to pass muster with the board.

 

Does it feel weird to anyone else that Culp is selling a huge asset to his old company? Does Culp still own all his DHR shares? Seems like a conflict...

 

I think this was Culp's latest form 4 ...looks like he still owns shares

 

https://www.sec.gov/Archives/edgar/data/313616/000031361614000092/xslF345X03/edgar.xml

 

smell a lawsuit coming should the deal close, but it could be won in Culp's favor given GE's financial woes?  Sale made under duress?

[Liberty]

I think this was Culp's latest form 4 ...looks like he still owns shares

 

https://www.sec.gov/Archives/edgar/data/313616/000031361614000092/xslF345X03/edgar.xml

 

smell a lawsuit coming should the deal close, but it could be won in Culp's favor given GE's financial woes?  Sale made under duress?

 

The price certainly doesn't seem low, but Culp knows exactly how DHR thinks about acquisitions and what they can do, so if it turns out that the business was under-earning and there was a ton of obvious fat to cut and DHR makes a killing on it, it'll certainly leave a bad feeling to GE shareholders because of the appearance of conflict, even if Culp did his best and didn't consciously give DHR preferential treatment just because they're his old buddies and he owns a ton of stock.

[gfp]

Sometimes you get a more fair deal for GE shareholders when the potential for an appearance of conflict of interest arrives.  They asked Buffett about the deal when it broke live and he seemed very happy for GE at the price DHR was paying.  I got the impression, purely speculative on my part, that GE was one of the companies Berkshire was talking with during the 4th quarter.  He was very up to speed on GE off the top of his head.  Probably no deal to get done there for BRK.

[Liberty]

Thread here with some thoughts about the deal:

 

[Liberty]

Considering ipo for dental unit:

 

https://www.reuters.com/article/danaher-divestiture/danaher-to-ipo-dental-unit-after-21-4-bln-deal-to-buy-ges-biopharma-business-idUSL3N20K4I8

[Liberty]

FTV splitting into two:

 

https://investors.fortive.com/press-release/corporate-news/fortive-announces-intention-separate-two-independent-publicly-traded

[dwy000]

Hmm.  When you announce a spin out like that with little detail, none of the Fortive leadership going with it, no mention of management team and not even a name for the spin out business it just reeks of a kneejerk reaction to poor performance.  Strong bet that the transportation business is having a really bad time right now and Fortive is anxious to classify it separately from the parent.  Will be interesting to see the filings and end of quarter results.

[scorpioncapital]

It seems spin-offs are being used in lieu of selling the division. Maybe lack of interest or pricing. One day we might see a spinoff like this: Spinning off the entire operation minus the cash at headquarters!

[Spekulatius]

Hmm.  When you announce a spin out like that with little detail, none of the Fortive leadership going with it, no mention of management team and not even a name for the spin out business it just reeks of a kneejerk reaction to poor performance.  Strong bet that the transportation business is having a really bad time right now and Fortive is anxious to classify it separately from the parent.  Will be interesting to see the filings and end of quarter results.

 

Beware of crapolla spinoffs from well run companies - WPG, REZI, GTX, KTB etc.

[Broeb22]

It seems spin-offs are being used in lieu of selling the division. Maybe lack of interest or pricing. One day we might see a spinoff like this: Spinning off the entire operation minus the cash at headquarters!

 

Maybe the tax basis is so low on the spin's assets that the tax hit makes a spin off more attractive? Does anyone fault Malone for spinning off assets instead of selling them?

 

Spek, are these really crappola businesses? Next time you pump gas, check who makes the gas terminal. It's almost certainly GVR, which has a very high market share (>50%).

 

Matco Tools operates in a pretty comfortable oligopoly that includes Snap-On Tools. SNA earns over 20% on tangible equity.

 

There are probably concerns about the automotive business being in secular decline once electric vehicles take over, which is perhaps the main risk to these businesses.

 

That risk notwithstanding, why are these bad businesses?