Posted on Thursday, November 17, 2011

In the December 2010 issue of the Investor Advisory Service we recommended Danaher, an industrial conglomerate with businesses ranging from dental equipment, to bar-coding, to analytical and scientific instruments. This large company had revenues in 2009 of $11.1 billion, and had grown earnings per share at an annualized rate of 17.7% since 2000. How have the company and its stock performed in the year since it was recommended?

Danaher Corporation (ticker: DHR) traded at 42.80 when we profiled the company in December 2010. At the time, we gave the stock a buy-up-to price of 49. Shares recently traded at 48.34, a 13% increase over the past year. The S&P 500 is up about 8% during the same period, including dividends.

We are attracted to the company because of its focus on cash flow and consistent organic growth. Few industrial companies show the kind of growth Danaher has.

In the same month we published our profile, Danaher reported third quarter EPS growth of 35% on revenue growth of 16%. DHR shares didn’t start to outperform the broader averages, however, until the next quarter, in which 20% EPS growth and 13% organic revenue growth exceeded Wall Street’s expectations. The stock traded into the low 50’s after the quarterly report, above our buy-up-to price. As the market stagnated in February, DHR continued to rise, with shares touching 56 in April 2010.

The stock was probably a little too hot at that point, because shares began reacting poorly to good news after that. In May, Danaher reported 10% organic growth and raised the midpoint of 2011 earnings guidance to $2.70, reflecting an improving economic environment. We raised our buy-up-to price from 49 to 54. August brought another guidance increase, to a midpoint of $2.79, representing 22% EPS growth over 2010. Nothing made the market happy in August, however. Between late July and early August, the S&P 500 decreased from 1,345 to 1,120. Danaher shares came down even more, from 55 to 40 during the same period.

In recent months, DHR shares have bounced back more than the broader market has, but the current price remains comfortably within our buy range and also toward the very low end of the company’s historical P/E range of 15 to 22.

Danaher pays a small (very small) dividend. We project future sales growth of 15%. Our current buy-up-to price is 54.

Disclaimer:  This company was selected for review in part because of its performance over the past year. Any outperformance relative to the broader market is not necessarily indicative of performance of the broader Investor Advisory Service.