3 Industrial Internet of Things Stocks

In a world getting used to global growth rates at far lower levels than in previous decades, large industrial companies can't simply rely on revenue growth in order to increase earnings significantly. Something more is needed. One of those "somethings" is the Industrial Internet of Things (IIoT), and there are three early adopters set to win out. Let's take a closer look at them.

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Danaher Corporation Earnings Analysis

The market gave Danaher's  (NYSE: DHR  ) third-quarter earnings results the thumbs-up and sent the stock up more than 3% on the day of their release, last Thursday. The numbers weren't fantastic, but they reassured Danaher investors that management is dealing well with an uncertain macroenvironment. But did we learn anything new about Danaher's prospects?

Danaher's earnings beat cautious guidance

Danaher declared that third-quarter earnings per share of $0.95 were above expectations, but management arguably had given cautious guidance the last time around. At the time of its second-quarter earnings, management had forecast that core revenue growth would be 2%-4% for the full year, and discussed ongoing weakness in two of its higher-margin businesses: communications testing (test and measurement segment) and U.S. dental consumables (dental).



In truth, nothing really changed from an end-market perspective in the third quarter. Core revenue growth came in at 3%, and the two specific product lines remained weak. However, there was some positive news on the weak product areas. Earlier in the week, Danaher announced the merger of its communications unit with NetScout Systems. Plus, strong growth in other parts of the dental segment more than offset ongoing sluggishness with U.S. dental consumables.



The end result was core operating margin growth in four of its five segments -- note the return to form in dental -- and action has been taken on its ailing communications (test and measurement) product line. The following chart is measured in basis points, in which 100 basis points is equivalent to 1%:

Source: Danaher Presentations.

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Why Has Danaher Stock Underperformed the Market in 2014?

Long-term investors in Danaher Corp. (NYSE: DHR  ) have grown used to watching their stock outperform the index in rising markets, with the stock price gaining around 200% over the past 10 years versus an 81% gain for the S&P 500. However, this year's underperformance of nearly 6% versus the S&P 500 must have them wondering whether the company has lost its touch. Why has Danaher started to underperform, and is it likely to continue?


Why Danaher Corp. has underperformed
In a nutshell, there are three reasons the stock has underperformed this year:

• There are questions about the company's ability or opportunity to make suitable acquisitions -- a key part of its business strategy
• CEO Larry Culp, whose 11-year tenure is partly responsible for the recent outperformance, announced in April that he would be leaving the company. 
• Two of the company's higher-margin businesses -- communications (test and measurement) and dental consumables -- have underperformed expectations.

Danaher Corp.'s existential angst
Companies' reputations define how investors look at them. In Danaher's case, the company has long been seen as an excellently run conglomerate that uses its substantive cash flow generation to make earnings-enhancing acquisitions.


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Is it Time to Buy Danaher Corp?

Unfortunately, Danaher Corp unveiled a second-quarter set of results that only sought to prove how choppy the global economic recovery has been. Its earnings were mixed, with its life science operations notably outperforming other industrial areas -- in common with what Pall Corporation  has been reporting. Moreover, the two principal areas of weakness should sound a note of caution to other investors.


Danaher Corp. saw weakness in its communications results -- test and measurement segment. This doesn't bode well for Agilent Technologies. Also, dental consumables sales disappointed; they looked more promising in the previous quarter. This isn't a good sign for dental distributor Patterson Companies, Inc..


Danaher Corp. disappointsGoing into the second quarter, investors had some cause for optimism. After all, in the first quarter, the company had recorded core revenue growth of 3.5% -- at the high end of its full-year forecast of 2%-4% core revenue growth. However, the second quarter saw core revenue growth slow to 3%.
In addition, Danaher Corp. saw margin growth held back by some setbacks in its communications and dental consumables businesses. Readers can see how this affected profit growth in the following chart.

Source: Danaher Corp. Presentations

In fact, the issues spoiled Danaher's otherwise excellent record of segmental operating margin expansion.


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