When I come across a Fortune 200 company that has beaten the S&P 500 for more than two decades, I take notice. Danaher (DHR) is one of these companies. It is a $35.7 billion large-cap science and technology leader serving customers in 125 countries.
Some of its products include: transaction systems with new levels of speed and security; microscopes that allow researchers to see life at 100 nanometers in 3D; painless, non-invasive dental diagnostics; disinfection technologies for drinking water; network analyzers that maximize uptime; and much more.
Danaher sports a forward PE ratio of 14.07, a PEG of 0.98, and a price to book ratio of only 2.10. Companies are attractively undervalued when their price to book ratio is under three and Danaher is right where we like it.
The company has double digit profitability with a profit margin of 13.5% and an operating margin of 15.85%. It reported a strong Q4 with a 30.7% increase in revenue growth and a 20.4% increase in quarterly earnings growth.
Danaher has operating cash flow of $2.63 billion and levered free cash flow of $1.07 billion. It's free cash flow is used to pay its modest dividend of 0.20%. However, only $68 million of the $1.07 billion is used to pay the dividend. Therefore, I think that Danaher has an opportunity to pay a higher dividend and still have plenty of money left to grow the business. If the company implemented a 2% dividend with 687.73 million shares outstanding, the amount of free cash flow needed would be $701.5 million. Danaher would still be left with $368.5 million of surplus free cash flow.
Danaher has exceeded its earnings estimates in all four quarters of 2011. It has 8 upward earnings revisions for 2012 and 9 for 2013. This should lead to more earnings beats in the next 2 years. It is expected to grow earnings at a healthy market beating 15.88% for the next five years. This should lead the current stock price of $51 to reasonably hit $100 by 2017.
CEO, Lawrence Kulp, stated in the Q4 report that Danaher is financially well positioned to take advantage of an attractive acquisition environment in 2012. He also stated that the company expects emerging markets such as India to continue to lead developed markets in 2012.
Mergers and acquisitions are a key part of Danaher's business philosophy. It has acquired more than 400 businesses since 1984. By acquiring these businesses, Danaher aims to achieve topline growth and operating income expansion. It is a diverse business spread over five primary segments: test and measurement, environmental, dental, life sciences and diagnostics, and industrial technologies. This diversity and growth should reward shareholders over the next two decades just as it has for the past two decades.