Last week’s Spotlight Stock in Wall Street’s Best Dividend Stocks featured Johnson Controls (JCI), recommended by Roy Ward of Cabot Benjamin Graham Value Investor, a company that is slated to split into two businesses. And so is the Spotlight Stock in this issue of Wall Street’s Best Investments. Danaher Corp. (DHR), recommended by Genia Turanova and Stephen Leeb, PhD, of The Complete Investor, will be separating into two businesses in the very near future.
Both businesses are in good company. Approximately 40 companies in the U.S. are scheduled to be spun-off in 2016—higher than the average of 33.5. And according to the Bloomberg U.S. Spin-Off Index of companies with a market value of at least $1 billion at inception—for the last decade—average share gains have been 118% in the first three years after the spin-off. That is more than double that of the S&P 500 Index.
Danaher will split into one segment with various medical and environmental units and certain parts of its other five segments. The second new business unit will be called Fortive, which will hold the industrial technologies and tests and measurement segments.
Since 1984, Danaher has acquired more than 400 companies, leveraging its Danaher Business System (DBS). According to the company’s annual report, “(DBS) began with our Jacobs Vehicle Systems business in the late 1980’s. It was there that Danaher became one of the first North American companies to utilize the principles of kaizen, a Japanese word that means ‘continuous improvement’.” DBS utilizes a decentralized operating structure on a global basis.
Now, the company is organizing these businesses into two separate parts that will join together those divisions of the overall corporation that are more closely-related.
The Fortive segment is in the rapidly-growing field of electronic test tools that enhance productivity. That is a very fragmented market—perfectly suited for a company like Danaher that is an ace at strategic acquisitions. The testing market is evolving at a fast pace, led by several trends:
• Testing as an ongoing process—incorporating testing into the design and fabrication process.
• Semiconductor manufacturers involved in the automobile market are altering their business processes to keep up with ongoing safety improvements.
• Cable providers are incorporating testing into their modems so that the entire network is its own test system.
• Fabricators are building pass/fail testing into the design process for chips.
• The Cloud will provide immediate and expert consultation should service technicians on the job need additional help.
• Standardization of homogeneous and heterogeneous products so that they play nicely with each other, which will include formal interoperability testing.
• Standardization of interfaces so that various IP’s (Internet Protocol) can seamlessly integrate with each other.
Danaher’s testing business includes instruments—test, measurement, and monitoring products; and communications
—items for the monitoring and security of traditional, virtualized, mobile and cloud-based networks. The products are sold across the globe—in North America, 55% of revenues; Europe, 18%; Asia/Australia, 20% and all other regions, 7%.
Current market research forecasts that the test and measurement (T&M) equipment market in APAC to grow steadily at a CAGR of nearly 7% until 2019. That bodes well for Fortive, but as Genia and Stephen say in their recommendation, you may also want to ‘stock up’ on the remaining Danaher segment for long-term growth.