Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewingÂ 5 Undervalued Companies for the Defensive Investor.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Danaher Corporation (DHR) fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Danaher Corporation (Danaher) designs, manufactures and markets professional, medical, industrial and commercial products and services. The Companyâ€™s research and development, manufacturing, sales, distribution, service and administrative facilities are located in more than 50 countries. It operates in five segments: Test & Measurement; Environmental; Life Sciences & Diagnostics; Dental; and Industrial Technologies. In April 2011, the Company sold its Pacific Scientific Aerospace (PSA) business. On June 30, 2011, the Company acquired Beckman Coulter, Inc. (Beckman Coulter). In January 2012, the Company sold its Accu-Sort businesses. In February 2012, the Company sold its Kollmorgen Electro-Optical (KEO) business. In January 2013, the Company acquired Navman Wireless. Effective August 2, 2013, Danaher Corp acquired Teletrac Inc, a developer of transportation software, from Vector Capital.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$49.83|
|Value Based on 0% Growth||$29.21|
|Market Implied Growth Rate||6.41%|
|Net Current Asset Value (NCAV)||-$3.40|
Balance Sheet – 3/28/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Danaher Corporation qualifies for the Enterprising Investor but not the Defensive Investor. Â The company passes all of the requirements of the Enterprising Investor, but the PEmg and PB ratios are too high for Defensive Investors. Â As a result,Â Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methodsÂ should feel very comfortable proceeding with further research into the company and comparing it to other opportunities through a review of Agilent Technologies (A) and 5 Undervalued Dow Components. Â From a valuation perspective, the company appears fairly valued after growing its EPSmg (normalized earnings) from $2.09 in 2010 to an estimated $3.44 for 2014. Â This is a strong level of demonstrated growth and is in line with the market’s implied estimate of 6.41% earnings growth, leading the ModernGraham valuation model to return an estimate of intrinsic value that falls within a margin of safety relative to the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Danaher Corporation (DHR)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
If you like our valuations, why not check outÂ ModernGraham Stocks & Screens? Â It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: Â The author did not hold a position in Danaher Corporation (DHR) or in any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.