Dover Corp - Zacks Investment Research



| Dover Corp. |(DOV –NYSE) |$93.19 |

Note: This report contains substantially new material. Subsequent reports will have new or revised materials highlighted.

Reason for Report: 4Q17 Earnings Update.

Previous Edition: 2Q17 Earnings Update; dated Sep 20, 2017.

Brokers’ Recommendations: Neutral: 66.7% (10 firms), Positive: 33.3% (5), Negative: 0% Prev. Ed.: 11; 5; 0

Brokers’ Target Price: $112.30 (↑ $23.30 from the last edition; 10 firms) Brokers’ Avg. Expected Return: 20.5%

Key Points to Note

• 4Q17 Snapshot:

Dover’s adjusted EPS surged 49% year over year (y-o-y) to $1.13, beating the Zacks Consensus Estimate of $1.04. Total revenues also increased 13% y-o-y to $2.02 billion, surpassing the Zacks Consensus Estimate of $1.99 billion.

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• Guidance for 2018 Above Prior Year — For full-year 2018, Dover guides its earnings per share will be in the range of $5.73-$5.93, representing an increase of 19% over the prior year. Full-year revenue growth is projected to grow 3-5%, which comprises organic growth of 5-7%, and a favorable impact from FX of 1%, partially offset by a 3% impact from dispositions.

Some Key Observations

• Dover continues its efforts to simplify portfolio with the company’s decision to spin-off the Wellsite business. This spin-off will help the company focus on less volatile core platforms and expects the transaction to close by May 2018. Further, significant drilling activity over the last few quarters has created a large backlog of drilled but incomplete wells. Dover anticipates many of these wells to be completed over the coming quarters, consequently driving performance.

Portfolio Manager Executive Summary

Dover Corporation (DOV or the company) owns and operates a global portfolio of manufacturing companies providing components and equipment, specialty systems and support services for a variety of applications in the industrial products, engineered systems, fluid management, and electronic technology markets. It is a decentralized corporation that supports autonomous operating companies focused on meeting the demands of its customers and served markets.

Of the 15 firms covering the stock, 10 assigned neutral ratings and five conferred positive ratings to the stock, while none of the firms had a negative stance.

Neutral or equivalent outlook — (10/15 firms or 66.7%) — The neutral firms believe Dover is poised to gain from rise in capital spending. Significant drilling activity due to the rebound in Energy demand also bodes well. Further, Dover’s decision to spin-off the Wellsite business will simplify its portfolio. The company’s cost-saving actions will also boost margins. Its M&A activities will likely act as catalysts. The Wayne acquisition will likely expand its presence in the attractive retail fueling market and continued project pipeline strength. However, few neutral firms think declining general industrial spending, weakness in the longer cycle oil and gas exposed markets will impede Dover’s growth. Moreover, foreign exchange volatility, delay in project timing and lower order activity are expected to dent the company’s performance.

Buy or equivalent outlook — (5/15 firms or 33.3%) — The bullish firms believe the company is well positioned for long-term growth across platforms driven by volume leverage and consistent operating improvements. Dover’s food equipment, pumps, and digital printing are anticipated to be its highest growth end markets. These firms believe healthy bookings, especially in retail refrigeration, will boost revenues.

Apr 6, 2018

Overview

Key investment considerations as identified by the firms are as follows:

|Key Positive Arguments |Key Negative Arguments |

|Dover has undergone substantial positive changes, like realignment of |Deterioration in the North American oil & gas markets due to fall in oil |

|its business units, changing operating management, divesting |prices. |

|underperforming business units, acquiring faster-growth and | |

|higher-return companies, and focusing on specific target performance | |

|metrics. | |

|A healthy balance sheet and strong cash flow provide the company with |Dover will bear the brunt of negative foreign currency translations and |

|ample scope for further acquisitions. |slower capital spending. |

|Dover remains committed to new product development and the |Dover might suffer due to the current global economic downturn. In addition,|

|implementation of cost-cutting activities to benefit its businesses. |intense competition and introduction of products may weigh on its |

| |performance. |

|Dover’s continued focus on acquisitions will leverage favorable growth |Soaring raw material prices will more than offset the price increase or |

|trends. The acquisition of Tokheim will bolster its position in the |cost-cutting efforts. |

|retail fueling equipment market. | |

Headquartered at Downers Grove, IL, Dover Corporation (DOV) is a worldwide diversified manufacturer of specialized industrial products and manufacturing equipment. Dover operated through four segments —

Energy segment, serving the Drilling & Production and Bearings & Compression end markets, is a provider of customer driven solutions and services for safe and efficient production and processing of fuels worldwide, and has a strong presence in the bearings and compression components markets.

Engineered Systems segment comprises two platforms, Printing & Identification and Industrials, and is focused on the design, manufacture and service of critical equipment and components serving the printing & identification, vehicle service, waste handling, and industrial end markets.

Fluids segment, serving the Pumps and Fluid Transfer end markets, is focused on the safe handling of critical fluids across the oil & gas, retail fueling, chemical, hygienic and industrial end markets.

Refrigeration & Food Equipment segment, serving the Refrigeration and Food Equipment end markets, is a provider of innovative and energy efficient equipment and systems serving the commercial refrigeration, and food service industries.

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More information is available at the company’s website .

NOTE: The company’s fiscal year coincides with the calendar year.

Apr 6, 2018

Long Term Growth

Dover operates a portfolio of industrial manufacturing companies with operating autonomy in order to foster entrepreneurship and focus on producing high-value, market share-leading products in targeted niches. The company’s transition from a portfolio company into an integrated enterprise, supply-chain rationalization, improved capital-allocation discipline and more structured-based practices to improve normalized performance and financial returns from prior cycles will drive growth. Major portfolio restructuring, internal reorganization in recent years and incremental investments focused on platforms, such as refrigeration systems & foodservice equipment, energy drilling and production products and product identification systems, will prove conducive to growth. The company remains committed to achieve annual organic sales growth in the range of 3-5% over the long term.

Dover has a long-standing history of making successful acquisitions in diverse end markets. In 2017, the company acquired three businesses in separate transactions. The businesses were acquired to complement and expand upon existing operations within the Engineered Systems and Energy segments. In January 2018, Dover acquired Ettlinger Kunststoffmaschinen GmbH and its affiliated entities, in a bid to boost presence in the plastics and polymers processing equipment industry. Per the deal, Ettlinger will become part of the Maag business unit within Dover's Fluids segment. Ettlinger’s high-performance filtration systems will fortify Maag’s position in the plastics-processing equipment industry.

In addition, Dover continues its efforts to simplify the company’s portfolio and increase focus on the markets with growth prospects. In December 2017, Dover decided to spin-off its Wellsite business into a stand-alone, publicly-traded company, in order to separate the company’s upstream energy businesses in the Energy segment. Dover's Wellsite business, which includes Dover Artificial Lift, Dover Energy Automation, and US Synthetic, operates in the oil & gas drilling and production industry. This spin-off will help Dover focus on its less volatile core platforms. The company expects the transaction to close by May 2018, subject to certain customary conditions. 

Within Fluids, Dover expects the Europay, Mastercard and Visa (EMV) upgrade cycle to accelerate in the United States, starting in the second half of 2018. Along with that, the company’s rising contribution in hygienic and pharma, and industrial pump markets will drive solid mid-digit growth in the segment. This growth will be complemented by margin expansion from retail fueling integration. Finally, Dover believes healthy bookings, especially in retail refrigeration, will drive higher revenues than previously projected. Furthermore, the company expects food equipment to have a stellar year.

Apr 6, 2018

Target Price/Valuation

A summary of target price/valuation as compiled by Zacks Research Digest is as follows:

|Rating and Valuation Distribution |

|Positive |33.3%↓ |

|Neutral |66.7%↑ |

|Negative |0.00% |

|Avg. Target Price |$112.30↑ |

|Digest High |$120.00↑ |

|Digest Low |$96.00↑ |

|No. of Firms with Target Price/Total |10/15 |

Risks to the target price include erosion in Dover’s energy businesses as rapid decline in oil prices will significantly impact energy capital spending and U.S. rig counts. Stronger-than-anticipated raw material inflation could put pressure on the company's margin. Macroeconomic uncertainty and foreign currency fluctuation will dent the company’s growth.

Recent Events

On Feb 15, 2018, Dover announced that its Wellsite upstream energy businesses will be named Apergy, post spin-off. Apergy will be a publicly-traded company headquartered at The Woodlands, TX. The company expects the transaction to close by May 2018, subject to certain customary conditions. 

On Feb 9, 2018, Dover announced a regular quarterly cash dividend of 47 cents per share.

On Jan 30, 2018, Dover reported 4Q17 earnings per share from continuing operations of $1.13, which surged 49% from 76 cents earned in the prior-year quarter. Earnings also beat the Zacks Consensus Estimate of $1.04.

Revenues

Dover’s year over year revenue growth in 4Q17 was driven by 6% acquisition growth and 8% organic growth, and a favorable impact from foreign exchange of 2%, partly offset by a 3% impact from dispositions.

Segment Performance

Energy: The segment reported revenues of $364 million in 4Q17, up from $293 million in 4Q16. Bookings were $354.8 million in the quarter, up from $299.8 million in the year-ago quarter. Backlog increased to $149.6 million in 4Q17 from $134.2 million in 4Q16.

Engineered Systems: Segment revenues climbed to $667.4 million in 4Q17 from $626.3 million reported in the prior-year period. Bookings increased to $681 million from $643 million in 4Q16. Backlogs were $440.2 million in 4Q17 compared with $351.7 million in 4Q16.

Fluids: Sales went up to $609.6 million in 4Q17 from $482.9 million in 4Q16. Bookings went up to $613.8 million in the reported quarter from $457.3 million in the year-ago quarter. Backlogs were $245 million in 4Q17 compared with $258 million in 4Q16.

Refrigeration & Food Equipment: The segment reported total sales of $377 million in 4Q17 compared with $376 million in 4Q16. Bookings were $319.9 million in the quarter compared with $336.6 million in the year-earlier quarter. Backlogs increased to $382.6 million in 4Q17 from $332 million in 4Q16.

Overall Bookings and Backlog

Total bookings amounted to $1.97 billion in 4Q17 compared with $1.74 billion in 4Q16. Backlog grew to $1.23 billion in 4Q17 from $1.08 billion in 4Q16.

Guidance

Dover projected its full-year 2018 revenue growth at 3-5%. The revenue growth guidance comprises organic growth of 5-7%, and a favorable impact of foreign exchange of 1%, partially offset by a 3% impact from dispositions. Dover expects its 2018 performance to benefit from the company’s continued focus on execution of strategies.

Outlook

One of the firms with a neutral outlook believes the rebound in Energy demand will drive Dover’s performance. The company’s focus on increased drilling activity bodes well. Further, healthy bookings, especially in retail refrigeration, will bolster revenues. However, these firms are skeptical about foreign exchange volatility, delay in project timing and lower order activity.

The bullish firms believe the company will benefit from solid growth across its end markets, including food equipment, pumps, and digital printing. Dover’s pump business has been benefiting from rising petrochemical prices. The firms also remain optimistic about its solid international retail fueling activity.

Margins

Cost of sales in 4Q17 was $1.28 billion, a 10.7% increase year over year. Dover reported SG&A expenses of $536.1 million during 4Q17, up from $455.6 million in 4Q16. Operating Income, as reported by the company, was $199 million in 4Q17 compared with $164 million recorded in the prior-year quarter. Operating margin expanded 70 basis points (bps) from the year-ago quarter to 9.9% in 4Q17.

Energy: The segment’s operating margin increased 90 bps y/y to 11.4% in 4Q17.

Engineered Systems: Overall operating margin in 4Q17 was 31.6% compared with 15.5% in 4Q16.

Fluids: The segment’s overall margin expanded significantly y/y by 790 basis points to 15.1% in 4Q17.

Refrigeration & Food Equipment: Overall margins considerably contracted y/y from 31.4% to 7.7% in 4Q17.

Guidance

The company expects ample organic growth and margin expansion in excess of 100 bps in 2018. 

Outlook

One of the firms with a positive outlook believes the company’s cost-reduction initiatives will lead to higher margins. According to the firm, restructuring efforts and higher volumes will provide ample opportunity for margin growth.

However, a neutral firm believes volatile raw-material costs and pricing pressure will remain threats for Dover’s margin performance. Additionally, slower-than-anticipated capital spending in the company’s core retail refrigeration end markets will put pressure on margins in the near term.

Earnings per Share

The company delivered earnings per share of $1.13 in 4Q17, which surged 49% from 76 cents earned in the prior-year quarter.

Guidance

Dover guides its earnings per share for full-year 2018 at $5.73-$5.93, representing an increase of 19% over the prior year. As part of its disciplined capital-allocation plan, Dover expects to deploy capital toward acquisitions which will aid growth.

Outlook

One of the neutral firms believes Dover is likely to benefit from volume leverage and continued operating improvements. The company’s M&A activities will remain a catalyst. The Wayne acquisition will expand its presence in the attractive retail fueling market and continued project pipeline strength.

Another firm with similar outlook noted that Dover’s decision to spin-off the Wellsite business will simplify its portfolio.

Sep Apr 6, 2018

|Analyst |Riya Dhar |

|Copy Editor |Deblina Halder |

|Content Ed. |Madhurima Das |

|Lead Analyst |Madhurima Das |

|QCA |Anindya Barman |

|No. of brokers reported/Total brokers|12/12 |

|Reason for Update |Earnings |

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Apr 6, 2018

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