Topic: Spinoffs

New spinoff offers you more gains

Danaher Corp LISTEN:  

We recommended investors buy Danaher in our very first issue (October 2017). At that time, this industry leader had just spun off its Fortive unit. Those who followed our advice have seen a market-beating gain of 57% in two years. The stock remains a buy.

Danaher now aims to repeat that success with another spinoff.

The company recently set up Envista, its dental equipment business, as a separate company. It then sold a portion of shares to the public. Danaher will likely hand its shareholders the remaining Envista stake in the next year or so. That new company’s pure-play focus should ultimately lead you to strong gains.

As for Danaher, it still plans to complete its purchase of GE’s BioPharma business this year. Those new operations should spur its revenue, earnings—and investor returns.

DANAHER CORP., $137, remains a spinoff buy. The company (New York symbol DHR; Manufacturing & Industry sector; Shares outstanding: 717.4 million; Market cap: $98.2 billion; Dividend yield: 0.5%; Takeover Target Rating: Medium; is a leading maker of precision-testing equipment and tools. Its major customers include medical research labs and municipal water utilities. Beckman Coulter, ChemTreat, Pantone and KaVo Kerr are among its leading brands.

In July 2016, Danaher combined its Test & Measurement business with its Industrial Technologies operations and spun off that firm as Fortive Corp. (New York symbol FTV). Shareholders were gifted with one share of Fortive for every two Danaher shares they held.

If you exclude Fortive’s contributions, Danaher’s revenue rose 54.6%, from $12.9 billion in 2014 to $19.9 billion in 2018.

Earnings during those five years jumped 63.3%, from $2.29 a share (or a total of $1.64 billion) to $3.74 a share (or $2.5 billion). Without unusual items, earnings per share rose 12.2%, to $4.52 in 2018 from $4.03 in 2017.

In the three months ended June 28, 2019, Danaher’s overall revenue rose 3.5%, to $5.16 billion from $4.98 billion a year earlier. Revenues increased on higher volumes, which offset acquisition-related expenses.

Excluding one-time items, the company made $880.4 million in the latest quarter. That was up 7.9% from $815.9 million. Per-share earnings increased by 3.5%, to $1.19 from $1.15, on more shares outstanding.

On September 18, 2019, Danaher spun off its dental operations as Envista Holdings Corp. (New York symbol NVST). It sold 26.8 million Envista shares to the public at $22.00 each. The company now owns 80.6% of Envista.

The new firm has three operating businesses: Nobel Biocare Systems, KaVo Kerr, and Ormco. Together, their more than 12,000 employees serve one million dentists in over 150 countries. In fiscal 2018, Envista had pro forma revenues of $2.84 billion and profits of $230.7 million.

In 2018, Envista generated $213 million in sales from China. It continues to focus on that country and other high-growth regions of the world. Together, they accounted for 23% of its overall sales. Meanwhile, though, Envista’s biggest market is North America, which generated 48% of its overall revenue. Europe and the rest of the world accounted for the remainder of sales.

Danaher still plans to buy the BioPharma business of General Electric Co. (New York symbol GE). That operation makes lab equipment for pharmaceutical companies developing new drugs. (Note: current GE head Larry Culp is the former CEO of Danaher.)

The company will pay $21.4 billion when it completes the purchase by the end of 2019. If you adjust for a $1.4 billion tax benefit, the price falls to $20.0 billion.

BioPharma should add $3 billion to Danaher’s annual revenue. About 75% is from recurring purchases of consumable materials; new equipment sales contribute 25%.

To help pay for this purchase, the company recently sold $3 billion worth of new common and preferred shares. It will borrow the remaining $18 billion. That will increase its debt from $10.1 billion as of June 30, 2019, to around $27.7 billion. The new figure is a high, but manageable, 28% of Danaher’s market cap. It holds cash of $5.4 billion.

The company will operate GE’s BioPharma operations as a separate entity inside its Life Sciences division. That existing unit contributed 33% of overall revenue in 2018.

Danaher feels the purchase will let it cut $100 million from its annual costs by the end of the third year. Thanks partly to those savings, the new operations should add $0.45 to $0.50 a share to the company’s earnings in the first year, rising to $1.00 a share by the end of the fifth year.

Even excluding the GE BioPharma business, Danaher will likely earn $4.79 a share in 2019. The stock has already rewarded investors with a 10% gain since the company announced the purchase. Danaher currently trades at a high, but still acceptable, 28.6 times that estimate. The $0.68 dividend yields just 0.5%, but should continue to rise on sustained earnings growth.


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