April 5, 2016

Adjusted Metrics Reveal Danaher’s True Post-Acquisition Value


Summary

  • Using adjusted earnings, Danaher’s adjusted return on assets is 16% for 2015 – significantly higher than the traditional 5% ROA most financial databases report.
  • This is primarily caused by DHR’s $26.4bn goodwill, which leads to a significant distortion of the firm’s economic reality under GAAP.
  • Also of note is the difference between the firm’s forward adjusted value-to-earnings ratio of 35.9x versus a traditional forward P/E of 17.8x.

DHR - 2016 04 01

Performance and Valuation Prime™ Chart

Under GAAP, as-reported financial statements and financial ratios of DHR do not reflect economic reality. The traditional return on assets computation understates the company’s profitability by incorrectly including certain items. The distortion of both profitability measures and valuation metrics of DHR were primarily driven by the inclusion of the firm’s immense goodwill ($26.4bn), which inflates the firm’s asset base, and by incorrectly expensing R&D ($1.2bn) and operating leases ($261mn) rather than treating them as part of the company’s investments.

After adjusting for similar issues and a host of other GAAP-based miscategorizations, Valens calculates DHR’s Adjusted Return on Assets as 16% in 2015. In contrast, most financial databases show a traditional ROA of only 5%, which is below cost of capital. Meanwhile, the firm’s Forward Adjusted Value-to-Earnings ratio is 35.9x, at the peak of historical valuations, while the firm’s traditional forward P/E is at 17.8x. The profitability of DHR’s operations and their equity’s true value are therefore not what traditional metrics originally suggest.


Click here to read the article in its entirety at Seeking Alpha.