Danaher is the consummate dealmaker (and investment banker fee provider). It trades companies like a baseball team trades players. Approximately half of Danaher's revenue has been part of Danaher for five years of less. In 2016, the company announced 10 deals alone.
In 2002, 32% of revenue came from tools and 17% came from niche products. In July, management jettisoned those divisions into a separate company called Fortive (FTV) - Get Free Report and focused its portfolio on diagnostic (32% of revenue), life sciences (32%), dental (16%) and water quality (12%).
Management likes these businesses because more than 60% of their revenue is from consumables. The dental business for example has estimated revenue of $2.8 billion in fiscal 2016, with gross margins of 55% and a mid-teens operating margin. Plus, more than 70% of revenue is from consumables. In diagnostic medical equipment, the business has a mid-teens operating margin, about $5 billion in revenue, and 80% of the business comes from consumables.
At the meeting, management updated 2017 guidance. The company said adjusted earnings per share would grow between 7% and 10% or between $3.85 and $3.95 per share. Organic revenue is forecast to grow between 3% and 4%. Management predicted the strong dollar would take $375 million out of revenue or 8 cents per share, which was slightly more than Wall Street had anticipated. (Analysts thought currency would take about 6 cents out of earnings.)
Revenue is expected to be $17.8 billion, up 6%. Using the consensus estimate of $3.94 per share, the stock is trading at nearly 20 times forward estimates, which seems like a pretty full valuation for single-digit top-line growth.
Assuming Danaher doesn't buy more revenue this year, next year the company will only grow revenue around 3%, because this collection of companies has little growth. Growth in the life sciences field comes from equipment sales, not from consumables. And with a collection of companies with 60% of revenue from consumables, I doubt Danaher will have much growth going forward.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.