Danaher Corporation Equity Research

Industrial conglomerate Danaher Corporation's  recent results were better than they superficially looked. Even though its second quarter guidance was lower than the market had hoped for, there is good reason to believe that Danaher has upside potential in 2014. Moreover, the earnings report suggested good things for other companies such as dental distributor Patterson Companies   in 2014, but less so for testing and measurement company Agilent Technologies . On balance, the positives outweighed the negatives, but is the company's stock still a good value?

3 reasons why Danaher's results were good
Danaher is the sort of company that often disappears under the radar of investors due to its low dividend yield and its P/E ratio of over 20 times current earnings. Moreover, its less than double-digit forecast EPS growth rate doesn't excite many. On the other hand, it's one of the best run companies in the industrial sector, and has relatively defensive end markets.

Focusing on the recent results, there are three key reasons why investors should like the company's stock.

 

READ THE FULL ARTICLE LINKED HERE

 

3 Reasons to buy Danaher Corporation

There is no shortage of stock ideas for investors in what can loosely be called the diversified industrial sector. But not all conglomerates were made equally. For example, in the case of Danaher  , it's very hard to find a direct comparison. Instead, the company competes across a number of sectors with smaller companies like DENTSPLY, Ametek, Sigma-Aldrich Corporation, Agilent Technologies, and Waters  Corporation. The stock is one of the most attractive of the industrial conglomerates and here is why.

3 reasons why Danaher stands out
First, the company has a well-deserved reputation for acquiring smaller businesses and then extracting every last piece of profitability it can out of them. It's been highly rewarding for shareholders (the stock is up threefold in the last 10 years), and it's also left them holding a company containing some pretty diversified businesses. In other words, Danaher has the kind of diversification that can generate growth through the business cycle.

 

READ THE FULL ARTICLE LINKED HERE

 

Roper Industries Equity Research

Roper Industries  $ROP is one of the most interesting industrial stocks, not least because it appears to be more of philosophical concept than a typical industrial conglomerate. In essence, it's a collection of four disparate businesses that operate within their own highly profitable niche markets. The common philosophy behind each segment is that they are high-margin and highly cash generative companies operating with relatively asset-light business models. While this strategy has been working very well for Roper shareholders so far, is the stock a buy right now?

Roper reports full-year results
In order to quickly outline how Roper makes money here is a chart of its segmental operating profits in 2013.

Source: company presentations

Having disappointed in the previous quarter, Roper reported some better numbers in the fourth quarter resulting in adjusted revenue up 9% and net earnings up 11% for the full year. Moreover, there are six key reasons why Roper can do well in 2013.

Margins and cash flow, increasing software, and growing orders
First, Foolish investors should appreciate how well the management has increased margins and cash-flow generation. Roper's gross margin was around 58% for the full year, but note how it has increased over the last few years, particularly when compared to companies like Danaher   and Dover Corp $DOV .  The latter two are not perfect comparisons, but they do provide a good benchmark to judge whether Roper's gross margin performance is merely a function of the economy or not.

DHR Gross Profit Margin (Quarterly) data by YCharts

Clearly, Roper is outperforming its peers in terms of gross margin, so this isn't just about the economy.  Moreover, its free cash flow generation and conversion is outstanding. Roper generated $760 million in free cash flow last year, representing a conversion rate of 141% of its net earnings. Looking into 2014, management predicted that operating cash flow conversion would be 140% of earnings. Based on my calculations, and Roper's guidance for full-year EPS, its free cash flow will amount to around $8.35 in 2014. In other words, it's on a forward free cash flow yield of around 6%.

Second, one of the reasons that Roper is generating increased margins and cash flows is due to its increasing amount of software sales. On the conference call, CEO, Brian Jellison outlined that "If you look just like the SaaS businesses, pure software businesses, we get more than a fourth of the Company's EBITDA out of that." Moreover, he also argued that if application software was included, the figure would be closer to half.

Usually, software as a service, or SaaS, based businesses tend to generate recurring revenues over longer periods. Indeed, Jellison disclosed on the conference call that Roper has "a lot of recurring revenue in radio frequency and in medical" and the fact that deferred revenue jumped 12.6% to $209 million bears that out. This implies that Roper is increasing the amount of long-term value it gets out of its orders.

Third, Roper's order book looked good in the last quarter, its book-to-bill was 1.01 versus 0.95 in the fourth quarter last year.

Q4 2013	Order Book Growth
RF technology	11%
Industrial technology	3%
Medical and scientific technology	12%
Energy systems and controls	14%
Company	10% organic, 16% reported

Source: company presentations

Recovering businesses, underlying guidance is better, end markets improving
Fourth, the businesses that had difficulty in the previous quarters managed to recover well in the quarter. Imaging (medical and scientific technology) orders were surprisingly strong with a double-digit increase. Meanwhile, its nuclear inspection business, Zetec, was described on the conference call as being weak "as expected", but its orders "tell us that really the worst is behind us". These two nuggets of good news help to de-risk the stock somewhat.

Fifth, superficially Roper disappointed the market by issuing full-year EPS guidance of $6.05-$6.25 when the analyst consensus was $6.20. However, there is an extra tax charge of $0.20 in 2014, without this charge the guidance would have been a more impressive $6.25-$6.40.

And finally, prospects in some of its end markets are looking better. For example, its water pumps business, Neptune (industrial technology), will benefit from increased housing starts. According to Halliburton and Baker Hughes the U.S. oil and gas rig count will at least stabilize in 2014, and this could be a positive for elements of Roper's energy systems and controls segment.

Is Roper a good value?
On a P/E basis, Roper is not the cheapest stock in the sector.

ROP P/E Ratio (TTM) data by YCharts

Moreover, on a forward P/E ratio of around 22 times earnings, it's hard to argue that it is anything more than fair value at the moment. On the other hand, Roper is a high quality company and for the reasons articulated above, it has upside earnings potential in 2014. Foolish investors may want to keep an eye out for any buying opportunity should it dip from here.

Cognex is a Great Way to Invest in Factory Automation

For the third quarter in a row, vision machine company Cognex (NASDAQ: CGNX  ) delivered satisfying earnings, confirming that its strategy remains on track. Now that the market's pushed its stock up 68% so far this year, let's look at its business trends, and assess whether the stock can still go even higher.

Cognex fires on all cylindersCognex's machine vision systems help manufacturers to monitor automated production processes. It reports revenue in three different markets, with the growth opportunity mainly coming from its factory automation segment, which provides around 80% of current revenue.

Its web and surface inspection segment (14% of revenue) also contributed handsomely. It reported a yearly increase of 9% in the quarter, and Cognex cited the aluminum market (particularly with automotive) in China as one main source of growth.

In fact, if you look over what Alcoa (NYSE: AA  ) forecast for end demand growth, many of the key markets that Cognex wants to target in China are doing well. Alcoa increased its expectation for end demand from the Chinese automotive market, which is likely to reflect positively on Cognex's future expectations in surface inspection.

The last segment is its semiconductor and electronics equipment market (6% of revenue). Unfortunately, this area of sales decreased 17% in the quarter, as the semiconductor industry's difficulties continue.

Factory automation is the key
Cognex has been firing on all cylinders with the factory automation market this year. Broadly speaking, its aims at the start of the year for this sector were were:

• Start commercializing revenue from the package-shipping companies that have been trialing its ID products

• Develop sales in China

• Open up markets for its products in new industries, and therefore diversify factory automation's revenue streams

So far the scorecard on these objectives is exemplary. With regard to logistics, Cognex declared in its conference call that "The Americas also set a new quarterly revenue record, helped by large ID product orders for logistics applications in distribution centers."

Indeed, the Q3 numbers contained $3 million of revenue from orders made in the quarter by a retailer ($600,000) and a "parcel delivery business" ($2.5 million). Happily, these sorts of orders will likely lead to repeat orders in the future.  Moreover, Cognex has five to 10 "very large global players" in logistics that are evaluating its ID products right now, and 20 more retailers and other companies looking at it.

Indeed, its ID product revenue grew by 45% in the quarter to $25.5 million, and now represents 35% of its total factory automation revenues.

Source: Company presentations and author's estimates.

As the chart indicates, Cognex is managing to expand its non-ID product revenue as well. And there is evidence that it's successfully developing markets in new industries. For example, the automotive sector previously made up 25% of its factory automation revenue, but it was only up "in the low to mid-single digits" in the quarter. Furthermore, its strongest-performing markets (aside from logistics and distribution) in the quarter were in areas like consumer products, life sciences, and medical devices.

Finally, its China revenue grew 28% to reach $10 million in the quarter, or around 11% of total company revenue.

Elsewhere, there are indications that spending remains solid in the sector.  Danaher's (NYSE: DHR  ) product-ID-based revenues were flat in the quarter, but this was partly due to coming up against a large one-off order last year. The underlying picture is far stronger. For example, Danaher's Videojet is a leading manufacturer of coding and marking solutions, while its X-Rite color measurement products are used across many of the same end markets that Cognex sells into. Both saw sales rise in the mid-single digits -- a good indication that Cognex's customers are continuing to invest .

Where next for Cognex?
The industry backdrop is positive, with Alcoa and Danaher confirming that there is growth in Cognex's key sectors. Moreover, Cognex is achieving its main objectives, and it will only take a few large orders from some logistics companies in order to see analysts scurrying to raise estimates.

However, on a forward P/E ratio of nearly 33 times forecast 2014 earnings, the stock is probably going to need earnings upgrades in order to move higher. It's a great company, and its outlook is definitively getting better, but it makes sense to wait for a dip here

Cognex is Seeing Excellent Growth

Many technology companies promise growth in the distant future, but Cognex (NASDAQ: CGNX  ) is starting to deliver on its potential right now. The company is the world leader in machine vision systems used in capturing and analyzing data from automated manufacturing processes. With the stock up over 52% in the last year, it's time for investors to look at more closely at this growth play.

Cognex starts to deliver

Every assembly line manufacturer or logistics operation needs to monitor production processes thoroughly, and Cognex's machine vision systems offer the ideal answer to this problem.Its systems help to ensure assembly line quality control and, insure that the plant is working at optimal efficiency. Cognex's growth opportunity is to increase penetration of its systems within manufacturers' processing plants.

In addition, the company has been trying to expand out of its core end-markets like automotive, and into less cyclical verticals like pharmaceuticals, logistics, beverages, and food. The good news is that its largest core end market (automotive makes up around 25% of its factory automation business) is doing relatively well this year. Furthermore, Cognex is starting to see some large orders coming in from its targeted growth areas like logistics and emerging markets.

Logistics and emerging markets

The company has long looked at the logistics market as a potential growth area, and its latest second-quarter results came with the announcement of a large order from a major logistics firm, such as UPS or FedEx. In previous conference calls, Cognex's management was keen to highlight that the logistics companies tend to take time to assess new technologies. However, the latest conference call saw company officials take a more bullish tone:

"The customer we reported winning the large order from is one of many significant customers we expect to have in that market. I would say it was the first breakthrough, but we expect more orders from that customer but perhaps, more importantly, from other large players in that market to come over the next quarters"

Cognex has discussed logistics as being a $250 million market opportunity, and any orders here will obviously help to generate interest in the broader $1 billion ID-products market that encompasses sectors like retailing and packaging. To put this into context, Cognex's revenues for 2012 were around $324 million.

With the global manufacturing center of gravity shifting toward emerging markets, regions like China are going to become increasingly important for companies selling industrial solutions. Indeed, within its key factory automation segment (78% of revenues), Cognex reported that $10 million (or nearly 15%) came from China. With its factory automation sales to China growing at 41% in the quarter, it's fair to assume that China's contribution will get bigger in future quarters.

Is it macro?

As ever, investors will want to assess whether Cognex's strength is due to macro factors or some specific industry or company strength. One of its key competitors, Danaher (NYSE: DHR  ) , also reported good numbers in its product ID sales. In its latest second quarter results (delivered in mid-July) Danaher reported its product identification revenues were up mid-single digits with sales rising in all its key regions. That's pretty good growth given that Danaher's overall sales were only up 2.5%, and it suggests that this segment of manufacturing is capable of growing faster than the market.

Given the connection between the two companies (Cognex's current CEO was formerly a VP of Danaher's product identification business) and Danaher's highly acquisitive nature, it's not hard to view Cognex as a potential target for its much larger competitor.

Where next for Cognex?

Cognex's excellent execution hasn't gone unnoticed by the market, and its valuation is now looking high.



CGNX P/E Ratio TTM data by YCharts

Looking ahead, the analyst consensus is for $1.98 in EPS for 2014. With the current price around $56, this would put Cognex on a forward P/E ratio of around 28. The chart above suggests this is a fair value for the stock, so it's hard to argue that the stock is a raging buy.

Cognex certainly has the capability to generate upside surprise (new logistics deals, expanding sales in new sectors, etc.), but you will need to assume this in order to see the stock as undervalued right now. This is a high quality company, but investors need to watch it closely for earnings upgrades and/or a better entry point.