As repeat readers of our blog are probably aware we view the world through an intangible-adjusted lens. We aim to make financial statements for all 1600+ companies in the MSCI World Index more informative, useful, and transparent by properly accounting for intangible investments. It is a transition that wealth accounting practices have begun to make (see our 2Q13 video on "Intangibles Go Mainstream" for more information) and it is our belief that someday in the future it will be standard practice for traditional company financial accounting as well.
While most people intuitively understand how important intangible investments and assets are for information technology companies and biotech companies (patents, r&d spending, etc), the massive diffusion of intangible wealth through the remainder of the economy is generally overlooked. With that in mind we would like to introduce to you (hopefully on a daily basis) a new Knowledge Leader from sectors and industries that you may not normally associate with intangible assets as well as a few of the more "traditional" high intangible usage intangible firms.
On to the analysis...
Danaher Corporation (DHR)
What Do They Do:
According to their website, DHR is a "science and technology leader designing, manufacturing and marketing innovative products and services to professional, medical, industrial, and commercial customers." DHR breaks out their revenue streams into five strategic segments: Test and Measurement, Environmental, Dental, Life Sciences & Diagnostics, and Industrial Technologies. Perhaps not exactly what you would expect from a company that falls into the Industrial Conglomerate sub-industry and the Industrial sector?
How has the stock performed:
DHR has gained more than 24% over the past year and has more than doubled over the past four years. DHR has had the best performance of any Knowledge Leader in the Industrial Conglomerate sub-industry and outperformed the MSCI World index by more than 46% over the past four years.
What do their financial statements look like (intangible-adjusted, of course):
DHR has the second highest gross margins in their sub-industry and the best inventory turnover ratio. They have managed to more than double their net profit margin over the past 20 years. They generate the best free case flow as a % of sales of any of their competitors and have the lowest traditional capex as a % of operating cash flow. And finally, they have a strong balance sheet with only 12% net debt and over 20% of their assets are long-term in nature.
Ok, where are the intangibles:
We mentioned already that they are on the low-end of the spectrum in traditional capex which always something that we like to see. However, even more importantly they lead the way in their sub-industry on intangible investment. This should help them to continue to increase profit margins and maintain their competitive advantage. DHR has the highest investment rate in Firm Specific Resources and the second highest in R&D.
Are their expected growth rates a tailwind to the stock (i.e. low) or a hindrance (i.e. high):
Consensus expectations for sales and EPS growth over the next four years seem to favor DHR. Over the next four years, sales are expected to grow by an average of 8% (very back loaded in FY4) and EPS is supposed to average 12% growth. Based on DHR's history, these growth rates do not seem unattainable.
As usual it comes down to price:
Valuations for DHR aren't necessarily that expensive on a relative basis but they certainly aren't cheap either. From a Price to Intangible-Adjusted Cash Flow perspective DHR falls smack dab in the middle of their sub-industry at 8.4x. This is below the average company in the MSCI World but slightly above DHR's 10-year P/CF average.