A Long Term Buy Despite CFO Sells

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Since the beginning of 2009, Danaher Corporation (NYSE: DHR) has enjoyed a decent rise from around $25 to $60.47 per share. To take advantage of the continuous price rise, both the CFO and Chief Accountant sold more than 154,000 shares combined for more than $9.4 million. Should investors be bearish or bullish on Danaher after these insider sales? Let’s find out.

A Cash Cow with Low Payout Ratio

Danaher is a provider of professional, medical, industrial and commercial products and services, operating in five main segments: Test & Measurement; Environmental; Life Sciences & Diagnostics; Dental; and Industrial Technologies. The majority of its revenue was generated from the Life Sciences & Diagnostics segment, accounting for 29% of the total revenue. The second biggest revenue contributor was Test & Measurement, accounting for 21% of the total revenue. Environmental, Dental, and Industrial Technologies represented 18%, 13% and 19% of the total sales, respectively. No single customer has accounted for more than 10% of the total consolidated revenue for the last 3 years. 

Danaher has been adopting mergers and acquisitions as a part of its growth strategy for nearly 3 decades. On the company’s website it said that it had acquired more than 400 companies since 1984. For the last 10 years, the company has kept generating growing profits and free cash flow. EPS increased from $0.47 in 2002 to $3.11 in 2011. Free cash flow grew from $645 million to nearly $2.3 billion in 2011. Its dividend has also risen from 2 cents to 9 cents during the same period. However, the payout ratio, which fluctuated in the range of 2.3% to 3.8%, has always been too low. Thus, if Danaher increases its payout ratio, shareholders will benefit from rising dividends and rising stock price.

High Insider Ownership

Daniel Comas, the CFO, only held 646,119 shares. In January, Comas sold 90,460 shares for nearly $5.5 million. Robert Lutz, Chief Accounting Officer, also sold 65,000 shares for nearly $3.95 million. However, Danaher still has high insider ownership. According to its recent proxy statement, the four biggest shareholders in the company includes two institutions and two individuals. The two institutions were T. Rowe Price Associates (9.6%) and FMR LLC (5.8%). The two individuals were Mitchell Rales (7.3%), a Director and the Chairman of Executive Committee, and Steven Rales (8.4%), the company’s Chairman. Thus, Mitchell Rales and Steven Rales, the two co-founders, owned around 15.7% of the company combined.

Danaher seems to be the most profitable company in comparison to its peers including General Electric (NYSE: GE) and SPX Corporation (NYSE: SPW). Trailing twelve months Danaher generated a 17% operating margin, while the operating margin of General Electric and SPX were 12% and 7%, respectively. Interestingly, Danaher has the cheapest valuation among the three companies. At the current price, Danaher is valued at 11.5x EV/EBITDA. With the total market cap of $236.3 billion, GE is valued at 18.26x EV/EBITDA. SPX is the smallest company with only $3.8 billion in market cap. The market is valuing SPX at 12.95x EV/EBITDA.

Foolish Bottom Line

Indeed, with the mergers & acquisition growth strategy, investors have to bet on management's capital allocation skills. Danaher’s management has consistently increased Danaher’s free cash flow over the past 10 years, showing that they could deliver shareholders’ value over the long time. Indeed, Danaher could be considered a long-term stock for investors. 


hoangquocanh has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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