Andreas Halvorsen’s Viking Global sells its shares in Danaher

Market Realist

Andreas Halvorsen and Viking Global Investors' 1Q 2014 positions (Part 5 of 8)

(Continued from Part 4)

Viking Global and Danaher

Andreas Halvorsen’s Viking Global Investors initiated new positions in Regeneron Pharmaceuticals (REGN), Pioneer Natural Resources (PXD), and Workday (WDAY). The fund sold positions in Danaher Corp. (DHR) and Walt Disney (DIS). Notable position increases included Illumina (ILMN) and Walgreens (WAG).

Viking Global Investors disposed of a large position in Danaher Corp. (DHR) last quarter. The position accounted for 2.22% of Viking’s total 4Q 2013 portfolio.

Danaher Corporation designs, manufactures, and markets professional, medical, industrial, and commercial products and services. Its business consists of five segments: Test & Measurement, Environmental, Life Sciences & Diagnostics, and Dental and Industrial Technologies.

Danaher drives growth via acquisitions

To increase sales growth and improve financial performance, Danaher pursues a number of ongoing strategic initiatives relating to idea generation, product development and commercialization, global sourcing of materials and services, manufacturing improvement, and sales and marketing under its Danaher Business System (or DBS) framework. Danaher also pursues acquisitions of companies that fit with its existing portfolio or expand its portfolio into attractive domains. According to the company’s 10K filing, “During 2013, Danaher acquired fourteen businesses for a total consideration of $957 million in cash, net of cash acquired. The businesses acquired complement existing units of the Industrial Technologies, Life Sciences & Diagnostics, Environmental and Test & Measurement segments. The aggregate annual sales of these fourteen businesses at the time of their respective acquisitions, in each case based on the company’s revenues for its last completed fiscal year prior to the acquisition, were approximately $300 million.”

In its 2013 annual filing, Danaher said, “The company expects overall market conditions to remain challenging due to macro-economic uncertainties and monetary and fiscal policies of countries where we do business. While individual businesses and end markets continue to experience volatility, the company expects sales from existing businesses to grow on a year-over-year basis during 2014 with sales growth returning to the Industrial Technologies segment and the other segments growing at rates similar to those experienced in 2013.”

Danaher said sales from its existing businesses in high-growth markets grew at a high-single-digit rate in 2013. Sales from existing businesses in developed markets grew at a low-single-digit rate compared to 2012, and were driven by North America and Japan, which grew at low-single-digit rates in 2013. This growth was offset by a slight year-over-year contraction in Western Europe, which saw scant growth in the second half of 2013 year-over-year. Revenues for full-year 2013 increased 4.5% to $19.1 billion, with core revenues increasing 2.5%.

Danaher announces a dividend hike

The company recently announced a regular quarterly dividend of $0.10 per share. This was a 300% hike from the prior dividend of $0.025 announced in 2012.

CEO Lawrence Culp to retire

The company also announced in April the transition of president and chief executive officer H. Lawrence Culp, who will retire next year. The release noted, “During Larry’s [13-year] tenure, Danaher’s revenues and market capitalization have increased approximately five-fold to nearly $20 billion and $50 billion, respectively, while at the same time driving shareholder returns five times that of the S&P500 Index. He has been instrumental in reshaping the portfolio and positioning us today as a leading global science and technology company.”

1Q 2014 results misses on revenue, GAAP earnings decline

The recent 1Q 2014 results missed revenue expectations. Sales for the first quarter of 2014 were $4.7 billion—5% higher than the $4.4 billion reported for the first quarter of 2013. Net earnings for the quarter ended March 28, 2014, were $579.7 million, or $0.81 per share on a diluted basis—a 17% decline from earnings per share of $0.98 in the corresponding quarter a year ago. During the first quarter, Danaher acquired five businesses for a total consideration of $163 million in cash that complement existing units of the Environmental and Test & Measurement segments.

Segment results

Test and Measurement revenues rose 2% to $871 million, with core revenues up 1%. The business was set up and expanded through the acquisitions of Fluke Corporation in 1998, Tektronix in 2007, and Keithley Instruments in 2010. Danaher said demand in the high-growth markets led the increased year-over-year sales in 1Q 2014, while demand continued to stabilize in Europe and declined in North America, due primarily to weakness in the U.S. government and military end markets. Fluke’s biomedical unit acquired Unfors RaySafe, a leading provider of quality assurance devices for diagnostic x-ray utilities during the quarter.

The Environmental segment provides products that help protect the water supply and air quality by serving two primary markets: water quality and retail or commercial petroleum. Revenues increased 6% to $768.7 million, with core revenues up 4%. Danaher entered the vehicle tracking and fleet management market through acquisitions of Navman Wireless in 2012 and Teletrac in 2013. Hach Company, a wholly owned subsidiary of Danaher Corporation, acquired the Ireland-based BioTector in 1Q 2014. BioTector Analyzers monitor process wastewater to highlight areas for increased efficiency, sustainability, and profitability.

In Life Sciences and Diagnostics, revenues grew 6% to $1.659 billion, with core revenues up 4%. Under diagnostics, the company saw strong demand in the acute care and pathology diagnostic businesses and, to a lesser extent, the clinical business. Year-over-year sales growth in the acute care diagnostic business was driven primarily by continued strong global consumable sales related to the installed base of acute care instruments, especially in China, the Middle East, and Japan. The life sciences businesses saw strong demand for recently introduced products. The acquisition of Beckman Coulter in 2011 more than doubled the size of the segment. Danaher said in its earnings call, “Beckman continues to strengthen its competitive position with first-quarter wins in North America exceeding those made during all of 2013.”

The Dental segment reported and core revenues grew 6% to $509.7 million, “Representing the segment’s best quarterly performance in three years.” The company entered the dental business in 2004 through the acquisitions of KaVo and Gendex. Growth was driven by increased sales of professional dental consumables, implants, and orthodontic products in all major geographies and continued increased demand for imaging products and treatment units in North America, high-growth markets, and Japan. In 1Q 2014, Danaher announced the formation of the KaVo Kerr Group, which strategically combines its dental consumables, equipment, hi-tech and specialty brands, under one global platform to “drive innovation, improve clinical outcomes, and simplify workflows.”

Industrial Technologies revenues grew 4.5% to $853.7 million, with core revenues up 3%. Sales from existing businesses in the segment’s motion businesses declined at a low-single-digit rate. Danaher added, “Improving year-over-year demand in the distribution market, primarily in North America, was more than offset by soft demand in technology, defense and industrial automation related end-markets, and the impact of exiting certain low-margin original equipment manufacturers product lines.” The company expects growth rates for the motion businesses to continue to improve in 2014.

An outlook below street consensus

The company’s guidance came below street expectations. For 2Q 2014, GAAP diluted EPS are expected in the range of $0.90 to $0.94. The company reaffirmed its full-year GAAP 2014 diluted net earnings per share guidance of $3.60 to $3.75.

Continue to Part 6

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