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Is Danaher the Next Berkshire Hathaway?

A conglomerate with focus


I’m always leery of any investment referred to as “the next [blank]”, because it usually ends up being the next investment I sell far below the price I initially purchased.

However, I love conglomerates, and particularly ones that are well-diversified because they at least mirror Berkshire Hathaway’s (NYSE:BRKA) structure. If they throw off a lot of free cash flow, which they can use for acquisitions, then so much the better.

I’d never even heard of Danaher (NYSE:DHR) until recently, which goes to show you that you can never do enough research in the stock market. The company operates in several divisions: Its test and measurement segment handles services for electronics equipment and communications networks and services. Its environmental segment offers instrumentation and disinfection systems for residential, commercial, and industrial applications. The industrial technologies division offers products and sub-systems that are incorporated by customers and systems integrators into production and packaging lines. It has a life sciences & diagnostics segment that handles all aspects of research and analysis. There’s even a dental segment providing equipment and consumables to dental professionals. That’s a lot, and an even more comprehensive list is here.

Now this isn’t exactly Berkshire (what is?), but what I like is that it is almost like a tech version of Berkshire. It bears resemblance to 3M (NYSE:MMM) and to General Electric (NYSE:GE) but is even more concentrated in the tech and medical arena. Each segment contributes almost the equivalent amount to total revenue, and is collected globally, with 49% coming from North America.

The company has a strong balance sheet with almost $500 million in cash. It has taken on a lot of debt over the past year, up to $5.8 billion from only $2 billion, but the debt is not at all expensive. The company can afford to do this as free cash flow has been steadily rising over the past few years, up to $2.1 billion in the trailing 12 months. It trades on a trailing P/E of 15, so it’s valued about the same as the other companies mentioned above.

Some of its other metrics are impressive — generating 13.4% net margins on 16.9% gross margins (both better than GE). Insiders hold an impressive 17% 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 another 18% this year.

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). It’s more concentrated and is doing well. There’s no dividend to speak of (0.2%), but it might be worthy of consideration in a regular diversified portfolio.

Lawrence Meyers does not own shares of any company mentioned.


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