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No Glamour but Spectacular Growth
09/20/2007 12:00 am EST
Jack Adamo, editor of Jack Adamo's Insiders Plus, says instrument and subsystem manufacturer Danaher has posted steady but superb growth for many years.
What attracts me to Danaher (NYSE: DHR) is massive insider ownership. The chairman of the board and his brother together own 14% of Danaher. Looking back two years, I see no sales from them despite their stock's strong performance. They've transferred the stock among their various investment vehicles and charitable trusts, but it's all in house: they haven't sold share one.
Danaher is not a typical infrastructure play: it doesn't build roads or help in construction. Yet, it is experiencing strong growth in emerging markets from improving standards of living. Half of its revenues come from international operations, and you can expect that segment to grow faster than its US business.
Danaher designs and manufactures critical care diagnostic instruments and high-precision optical systems used by doctors and dental professionals. It doesn't make the end products you see on the street, like a car; it makes the subsystems that go into various end products and systems. These fall into such categories as water control and processing; identification equipment; motion, position, speed, and temperature sensing instruments; and aerospace safety devices.
Danaher's stock price has grown at a compound annual rate of 25% for the last 20 years. Moreover, the company's market capitalization is only $25.5 billion, so it is not yet anywhere near the size where continued growth gets difficult.
[Without] a number of one-time gains last year, earnings per share rose 17.5% year over year. Full-year earnings are expected to come in at about $3.80, giving the stock a P/E of 22x. That's a little higher than I normally like to pay, but for a growth company of this quality and consistency, it's worth it.
A conservative estimate of next year's earnings is $4.29. On that basis, we're paying a reasonable price for the implied 13% growth, but growth could come in close to this year's 17% figure, making the price even more palatable.
The balance sheet is very solid. Long-term debt to total capitalization is just 29% and interest coverage is a very cushy 18x. Operating cash flow is well above earnings, and free cash flow (cash flow in excess of amounts needed to maintain operations) is very healthy, too. Annualized return on equity for the first half of the year was 17%-high enough to attract any growth investor.
All in all, the company's financial condition and performance is stellar. DHR should continue to benefit from the improving fortunes of developing economies all over the world for many years to come. In addition, the weak dollar should boost earnings for the foreseeable future, as it did this year.
Danaher Corp. is a buy up to $80. (It closed below $83 Wednesday-Editor.)
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