Investment Jungle

Today, we will have a look at Danaher Corporation which trades on the NYSE under the symbol DHR. It was another stock identified by Mr. Beantown. Let’s have a look and see if we have a Rule #1 stock in our midst!

Company Profile:

From Yahoo Finance

Danaher Corporation engages in the design, manufacture, and marketing of professional, medical, industrial, and consumer products. It operates through four segments: Professional Instrumentation, Medical Technologies, Industrial Technologies, and Tools & Components. The Professional Instrumentation segment produces and sells compact, professional electronic test tools and calibration equipment; water quality instrumentation and consumables, and ultraviolet disinfection systems; and retail/commercial petroleum products and services, including underground storage tank leak detection and vapor recovery systems. The Medical Technologies segment designs and manufactures critical care diagnostic instruments, high-precision optical systems for the analysis of microstructures, and a range of products used by dental professionals. The Industrial Technologies segment manufactures products and sub-systems that are incorporated by customers and systems integrators into production and packaging lines, and by original equipment manufacturers into various end-products and systems. It offers product identification equipment and consumables; motion, position, speed, temperature, level instruments, and sensing devices; power switches and controls; power protection products; liquid flow and quality measuring devices; aerospace safety devices and defense articles; and electronic and mechanical counting and controlling devices. The Tools & Components segment produces and distributes general purpose and specialty mechanics’ hand tools, as well as toolboxes and storage devices, diesel engine retarders, wheel service equipment, and drill chucks.

Market capitalization is $25.64B.

Fundamental Analysis:

Being a number cruncher, you know I like to start looking at the Big Five.

So how has management performed? Looking at the return on invested capital, DHR has managed to deliver our Rule #1 investor minimum of 10% ROIC each and every year for the last 10 years. They have been very consistent in the 12% range.

Return on equity shows management’s consistency. The 10 year average ROE is 15.34%. The 5 year average ROE comes in at 15.02%. Slightly down, but very consistent.

Equity growth rate has also been rock steady. The 9 year rate is 20.09%. The 5 year rate inches higher to 21.78%. The 3 year rate inches back down to 20.89%. And last year’s equity growth rate came in high at 29.66%.

Earnings per share growth rate has not been quite as consistent. The 9 year rate is 19.61%. The 5 year rate increases to 24.47%. The 3 year rate edges even higher to 25.29%. And last year’s EPS growth rate took a serious step back to 16.85%.

Sales growth rates once again come in consistent. The 9 year rate was 17.06%. The 5 year rate climbs higher to 20.71%. The 3 year rate continues on up to 21.31%. And last year’s sales growth rate dipped to 20.18%. Pretty solid consistency I must admit.

Cash flow growth rate - like EPS growth rate - isn’t quite as pretty. The 9 year rate is 16.45%. The 5 year rate climbs up to 19.82%. The 3 year rate jumps to 24%. But last year’s rate dropped to 15.95%.

All in all, some very consistent growth rates and management did deliver our required ROIC.

Stock Analysis:

Now on to the fun part - calculating a sticker price.

For my future EPS growth rate, I initially estimated 20.09% which comes from the 9 year equity growth rate. However, analysts have forecast only 15.8%. So I will go with their more conservative estimate.

For my future P/E, I took the 5 year average P/E of 21.53 which is slightly lower than the current P/E of 22.36. Even the 10 year average P/E isn’t too far off at 23.32. Pretty consistent P/E throughout the decade.

With this information, the sticker price worked out to $84.68. At the current price of $82.06, Mr. Market is selling this stock at a slight discount of 3.10%. Of course, that also means that he is selling this stock at a premium of 93.8% over the MOS price!

Here is my Rule #1 analysis of DHR.

Here is the 1 year stock price chart:

This is a very nice upward trending stock.

Conclusion:

Well, the Big Five look good to me. A bit of a concern over a drop in the EPS growth rate and the cash flow growth rates in 2006. So I would consider this a Rule #1 stock.

Unfortunately, it is not selling anywhere near its MOS price. Definitely one to watch.

Full Disclosure: I do not own shares in DHR.

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