Danaher: A Scientific Berkshire Hathaway

Let’s get one thing out of the way: there is no “next Berkshire Hathaway” (NYSE:BRKA) or “another Berkshire Hathaway”.  There are, however, conglomerates that have taken similar approaches to Warren Buffett, and become amazing long-term businesses.
Danaher is basically a life sciences conglomerate that has gobbled up other companies and become a leader in a number of different science segments.  Its Test & Measurement segment provides products that are used in electronic design, manufacturing, and technology development, as well as communications and enterprise networks. Its Environmental segment offers instrumentation and disinfection systems for water and fuel services; Its Life Sciences & Diagnostics segment provides various research and clinical tools, and a range of analytical instruments and materials for hospitals, doctors, laboratories, and critical care. Its Dental segment provides dental consumables and equipment.  Its Industrial Technologies segment offers equipment, consumables, and software for consumer and industrial products; as well as sensors and instruments to manufacturing and utilities.
Some may say the company bears more resemblance to tech conglomerates like 3M (NYSE:MMM) and to General Electric (NYSE:GE), but is even more concentrated in the tech and medical arena. This is a very interesting play in the conglomerate arena, and is different from those mentioned, and others like Tyco (NYSE:TYC) and Leucadia National (NYSE:LUK).
Each segment contributes almost the equivalent amount to total revenue, and is collected globally, with around half coming from North America.
The company is in great financial shape, as you would expect from a conglomerate.  It has $3.3 billion in cash and just over $3 billion in debt, having paid the balance down from over $5 billion in recent years.
I like conglomerates because they are diversified, so that economic or sector issues that affect some products will not affect the entire company.  That tends to mean cash flow is going to be reasonably stable.   In addition, there isn’t a lot of capex because money is spent on the R&D side, so cash isn’t just going into maintenance.
Free cash flow is solid at Danaher, rising from $2.3 billion in FY11 to $3 billion in FY12 and FY13.
Some of its other metrics are impressive — generating 13.5% net margins on 17.2% gross margins (both better than GE). Insiders hold an impressive 13.6% of the company, and I love seeing management and shareholder interests aligned like this.
I particularly like companies in the life sciences and those that handle down-and-dirty technical work like Danahar does. It’s the kind of scientific infrastructure play that tends to get overlooked, and doesn’t get hit too badly in bad economic times. While net income did fall in 2009 compared to 2008, it roared back 50% in 2010 and 18% in FY11.
Growth has since tapered a bit, rising 10% in FY12, but rebounding to 12.6% in FY13. Analysts project 12.3% long term growth.  The company, however, trades at 21x this year’s estimates.  That’s pricey for me at this exact moment, but I love Danaher so much that it is on my watchlist, so if the market should break down, I want to scoop it up.  Dividends included!
Lawrence Meyers does not own shares of any company mentioned.

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