Danaher and Pall Corps. To Merge and Split in Creative M&A Deal

 

Danaher Corporation (DHR) will acquire Pall Corp. (PLL), a manufacturer of fluid filtration systems, for a purchase price of $13.8 billion. Danaher will acquire Pall’s cash, and assume its debt. The deal is expected to close in the fourth quarter of 2015. Pall’s shareholders will receive $127.20 cash per share.

Danaher will then split into two companies: a science & technology company, named Danaher; and a smaller industrial company, which includes Danaher’s test & measurement business. The spin-off will occur in late 2016.

Thermo Fisher Scientific (TMO) had been competing to purchase Pall Corp.

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DANAHER CORP.: HOLD 

(DHR, $87.78, up $1.78 midday)  

Danaher Corp. manufactures science and technology products, including tools, process/environmental controls, and telecommunications equipment.

I last wrote about Danaher Corp. on June 16, 2014, reiterating that the stock was overvalued, based upon having a price/earnings ratio (PE) that was twice as high as its earnings growth rate.

 

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Prior to today’s merger announcement, Wall Street expected Danaher’s revenues to grow 3% and 5% in 2015 & ’16; and earnings per share (EPS) to grow 14.1%, 9.3%, and 10.3% in 2015 through 2017 (December year-end).  These are attractive EPS growth numbers, but not strong enough to qualify for a buy recommendation at Goodfellow LLC.

Danaher’s PE remains higher than the earnings growth rate, at 20.5.  In that light, the stock remains overvalued. Only once, in the last five years, did the stock’s PE rise above 20. Therefore, be aware that we might be seeing the high price on DHR for the time-being.

The dividend yield is small, at 0.6%. The company’s long-term debt-to-capitalization ratio is very low, at 13%.

I am not saying that overvalued stocks do not go up. I am merely saying that I am a growth/value investor, seeking to minimize the risk in stock investing. One way that I minimize risk is to buy undervalued stocks, because they’re less likely to have negative price fluctuations than overvalued stocks.

The stock price reached an all-time high of $88.10 in February, pulled back, then peaked at $90.25 this morning.

 

RECOMMENDATION

Based upon upside price resistance on the chart; the stock trading at the typical annual high within its PE range; and the fact that DHR shares are overvalued, my best guess is that the stock price will remain in the $80’s for many months to come.

Last June, I encouraged shareholders to hold their shares, and to use stop-loss orders.  My recommendation stands.

Goodfellow LLC rating:  Hold, Public  (05/13/15)

DHR is a large-cap growth stock.

Danaher Corp. (DHR)   one-year chart   05-13-15

Danaher Corp. (DHR) one-year chart 05-13-15

Chart courtesy of StockCharts.com.

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 PALL CORP.: SELL near $127

(PLL, $123.98, up $5.36 midday)      

Prior to today’s M&A announcement, Wall Street expected Pall Corp.’s EPS to grow 8.4%, 11.5%, and 11.3% in 2015 through 2017 (July year-end). Based on today’s increased share price, the 2015 PE is 33.2, which is exceedingly high, in light of the dramatically slower EPS growth.

Pall Corp. has not recently received a buy recommendation from Goodfellow LLC, due to having a PE that’s 2-3 times as high as the EPS growth rate.

PLL shares have a current dividend yield of 1.0%. The company’s 2014 long-term debt-to-capitalization ratio was low, at 13.5%.

The stock price reached an all-time high of $106.19 in February, then traded as high as $124.61 this morning, on the merger announcement.

 

RECOMMENDATION

Current shareholders should give the stock a little time to climb towards the buyout price of $127.20. And while it’s unlikely that the merger transaction will fall apart, you might consider using stop-loss orders, to protect yourselves from worst-case scenarios.

If I owned PLL, I’d sell soon — whether it reaches $127 in the near-term, or not — because I’m more of an opportunist. I like my capital to be working for me, as much as possible. Therefore, I’d sell soon, and reinvest my capital into an undervalued growth stock, for continued capital appreciation potential.

Goodfellow LLC rating:  Sell near $127, Public.  (05/13/15)

Pall Corp. (PLL)   three-month chart   05-13-15

Pall Corp. (PLL) three-month chart 05-13-15

Chart courtesy of StockCharts.com.

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I use a combination of strict fundamental and technical criteria to choose the stocks that receive buy ratings from Goodfellow LLC. Each facet of my investment criteria serves to lower the risk associated with stock investing. My investment strategy works — year in and year out.


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Crista Huff

President

Goodfellow LLC

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