Danaher Looks Like a Relative Bargain

NEW YORK ( TheStreet) -- With shares of General Electric ( GE), Honeywell ( HON) and ABB ( ABB) all trading at or near their 52-week highs, there certainly aren't any bargains left in the industrial sector these days. But in the case of Danaher ( DHR), whose stock is far from cheap, this may still be one of the few bargains left.

Danaher stock, which has just received an upgrade from a Goldman Sachs analyst with an $88 price target, is not going to sneak up on anyone. After all, this well-run industrial conglomerate has been a popular pick on the Street for years.

Even so, while the stock has already gained 36% on the year and continues to trade in tandem with GE and Honeywell, management has shown that it has bigger ambitions. And with the company's strong history of return on invested capital, not to mention its reputation as a strategic acquirer, I believe this is a company to watch heading into 2014.

Now, I won't tell you that Danaher has had an exceptional year. Despite the sector's performance, which has been (at best) uninspiring due to weakness in the industrial environment, it's a marvel that Danaher has posted any gains at all.

That said, the encouraging aspect about this business is that Danaher has never disappointed investors from the standpoint of business segment profits or organic revenue growth. And this recent quarter, which produced 6% and 9% growth for revenue and profits, respectively, was no different.

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Segment wise, growth was led by the environmental and life sciences business, which delivered year-over-year growth of 10.5%. Of which 6% was organic. As with GE and Dover (DOV), which have built their breadth of end-market exposure via mergers and acquisitions (M&A), organic growth, which measure a company's performance while excluding M&A deals, is an important metric.

To that end, Danaher's 6% organic growth stands up favorably to that of Dover, which I happen to like. Likewise, with 4.5% organic growth (10% total) in the environmental business, Danaher continues to prove skeptics wrong that this segment, which provides products to treat water and air quality, could be a viable business.

That's not the case, however, for the test and measurement business, which continues to struggle with revenue declining in the quarter by 0.5%. That segment, which provides electronic measurement instruments and monitoring, took a slight dip on a sequential basis.

I won't pretend the continued weakness in the test business is not an ongoing concern. I believe there are opportunities in this area for management to reverse course and generate value. Plus, with a little over $8 billion in total assets, Danaher has the resources to shop for growth. This is the nature of the business.

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In that regard, there are large medtech companies, like Abbott Labs (ABT) and to a lesser extent Johnson & Johnson (JNJ), which have medical device businesses that have underperformed this year. And I believe for the right price, they could be persuaded to unload them.

In the meantime, investors have to be mindful that even with the sluggishness in the test business, Danaher still grew operating income by 9%. And to say nothing about operating margin expansion and cash-flow growth.

Just to keep things in context, I'm not suggesting that this was a blowout quarter. But it has to be appreciated in the sense that this is still a pretty dreary industrial environment. I don't need to make excuses for a stock that just received an upgrade and is trading near its 52-week high.

Nevertheless, given management's reputation as a savvy acquirer, not to mention the company's strong returns on invested capital, these shares look undervalued by 25% heading into 2014.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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