Given the weakening in the industrial economy in the last six months, investors have increasingly bought into companies like Danaher for two main reasons:
First, its mix of healthcare and niche technology businesses and minimal exposure to oil and gas capital spending means it should avoid the worst of the slowdown.
Second, it's somewhat of a special-situations stock in the sense that its $13.8 billion acquisition of filtration company Pall Corp.was with the intention to separate itself into two publicly traded companies.
That said, do its recent third-quarter results back up this thesis?
Danaher's third quarterCompared to last year's third quarter, overall revenue increased 6.5%, comprising core revenue growth of 3% and contributions from acquisitions of 10.5%. Unfortunately, foreign currency movements reduced earnings by 7%. According to CFO Daniel Comas on the earnings call, Danaher has 25% of revenue in high-growth markets, and a basket of the top emerging-market currencies depreciated around 10% in the quarter -- so Danaher is exposed to emerging-market currency devaluation.
Adjusted diluted EPS increased 6% in the quarter to $1.05 -- a cent ahead of the high end of its guidance range of $1.00 to $1.04. Moreover, management's guidance for adjusted diluted net EPS for the fourth quarter of $1.25 to $1.29 implies a full-year range of $4.28 to $4.32 -- ahead of previous guidance for $4.25 to $4.33.
In short, it was a pretty good quarter on the earnings front, but there are some signs of weakness. For example, core revenue growth of 3% was a bit below expectations for 3.5%, and Comas outlined how September core revenue growth was only up 2% -- below internal expectations for 3%. Moreover, management gave guidance of only 2% core revenue growth for the fourth quarter -- an indication that Danaher's revenue growth is slowing.
Segmental overviewI'm focusing on core revenue and margin when discussing Danaher because the company has a highly acquisitive business model. In a nutshell, management tends to build value by acquiring companies and then applying its Danaher Business System, or DBS, in an effort to release value (you can find more on the subject in the linked article).
As such, a look at core revenue growth for core operating margin movement reveals much about the quarter.
Source: Danaher presentations; bp = basis points;100 BP = 1%.
It's no surprise to see industrial technologies reporting zero core revenue growth in the quarter, with CEO Tom Joyce citing weakness in capital spending in automation in North America and China. It's a theme picked up on in recent results from Illinois Tool Works and other peers.
Danaher's test and measurement segment reported a much better quarter than Illinois Tool Works did, with the latter reporting a whopping 11.3% revenue decline in its test and measurement segment in the quarter. Moreover, Illinois Tool Works reported a 210 bp decline in the segment's operating margin -- a far cry from Danaher's 80 bp improvement.
Danaher has a large part of its revenues exposed to the health and public healthcare sectors, and on the earnings call Joyce spoke of the environmental business as having "terrific opportunities" in China where "we really continue to look at a number of sectors in that market where our businesses are extremely well positioned."
Similarly, he referred to growing "extremely well" in diagnostics in China. However, as you can see above, the life science and diagnostics segment took a margin hit, which Joyce attributed to being "negatively affected by continued weakness in emerging market currencies and cost actions taken during the quarter."
Unfortunately, dental is seeing some ongoing difficulty in reducing equipment inventory. In the last quarter's presentation, management spoke of its customers "approaching the tail end of inventory destocking."Fast-forward to the third quarter and Joyce admitted: "Inventory rightsizing in the channel [has] taken us a little bit longer than we had anticipated. So that is a bit of a headwind there. And secondly, we did see some slowdown in equipment purchases, particularly in the high growth markets."
The takeaway There are definitely some signs of slowing in some of Danaher's end markets, and dental continues to disappoint, but overall the company continues to look relatively well placed. Broader-based industrial companies like Illinois Tool Works have been reducing earnings guidance, but Danaher managed to increase full-year expectations slightly-- a sign that it can continue to outperform the market.
Meanwhile, the Pall acquisition is ahead of schedule and the company's plan to release value by splitting itself in two in 2016 remains on track. Danaher had agood set of earnings, which is another confirmation that the stock is a safe haven for investors in the industrial sector.
The article Danaher Corporation Remains a Safe Haven originally appeared on Fool.com.
Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends Illinois Tool Works. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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