We are reaffirming our Neutral recommendation on Danaher Corporation (DHR). In the most recent quarter, core revenue growth was broad-based across all segments with Test & Measurement up 24.3%, Environment up 5.0%, Life Sciences & Diagnostics up 30.5% and Dental up 17.8%. During the quarter, the company completed three acquisitions with the most recent being that of Beckman Coulter.
The company is optimistic about its potential to drive organic growth and margin expansion, driven by increased exposure to higher growth emerging markets, with the help of its DBS system. However, the company’s dependency on the timely development, commercialization and customer acceptance of new products and product enhancements based on technological innovation is a matter of concern. In addition, the company operates in highly competitive industries.
Danaher is continuously improving business performance in the critical areas of quality, delivery, cost and innovation. The company follows a number of strategic initiatives with respect to idea generation, product development and commercialization, global sourcing of materials and services, manufacturing improvement and sales and marketing.
The company follows an aggressive acquisition strategy and is on a constant look out for business that strategically fits its existing business portfolio and which also help the company to expand and diversify into new and attractive business avenues. The most recent acquisition was Beckman Coulter. Through this acquisition, the company intends to take full advantage of strategic synergies in clinical and research applications that Beckman carries, with the company’s Life Sciences and Diagnostics businesses.
Danaher generates strong free cash flow annually. During the second quarter of fiscal 2011, net cash flow from operating activities was $1.1 billion, reflecting 20% cash flow productivity. The cash flow allows management the opportunity to invest in acquisitions and product development.
However, as Danaher markets its products in industries that are characterized by rapid technological changes, frequent new product introductions and changing industry standards, its growth depends on the timely development, commercialization and customer acceptance of new products and product enhancements based on technological innovation.
In addition, the company operates in industries that are intensely competitive and in many cases have been subject to increasing consolidation. Because of the diversity of products that the company markets and the variety of markets it serves, it has to face a wide variety of competitors.
Danaher currently hold a Zacks #2 Rank which implies a short term Buy rating.
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