Dover Corp (DOV, Financial) is a $10.51 billion market cap company that manufactures a broad range of specialized industrial products and sophisticated manufacturing equipment.
Better profitability
The company has made several acquisitions, more than 100 deals, but also it has made divestitures and the spinoff of Knowles Corp. (KN, Financial) to shareholders in 2014. The company operates in four segments: Engineered Systems, Energy, Fluids and Refrigeration & Food Equipment. Apart from that, its business mix consists of more than 40 separate businesses and even more products.
The energy segment will probably take some time to recover, but, on the other hand, the fluids segment will benefit from the recent Tokheim acquisition.
Although the growth strategy is based on several initiatives, such as organic growth, strategic acquisitions, expansion and improving operating efficiency, the company has shifted its portfolio toward businesses with more attractive margins that require less capital. The acquisition strategy is based on eyeing businesses with higher profit margins, principally smaller ones the company knows well. It needs strong cash flows to find assets to add.
Further, Dover has focused on launching new products as well as marketing activities, such as customer service, implementing pricing initiatives and expanding market share. This panorama could be affected by lower economic growth in some regions such as Europe or Asia or less industrial activity.
According to Yahoo! (YHOO, Financial) Finance, the estimated one-year target share price is $63.18. Moreover, the mean price target of Marketbeat stands at $64. So there is no return from price appreciation. As of today, the trailing annual dividend yield is 2.43%, which is the other component of the return on investment on a stock.
Dover has reasonable debt levels as well as valuation levels and profit margins. Revenue declined by 14.4% and led earnings per share decreased in the fourth quarter compared to the same quarter a year ago (80 cents vs. $1.03). During the past fiscal year, the firm reported lower earnings of $3.75 versus $4.62 in the previous year. Analysts are expecting a further decrease of 5.8% in earnings ($3.53 versus $3.75).
Analysts revised their estimates, and they were not good. For example, UBS downgraded the stock to “sell” from “neutral.” Moreover, analysts at SunTrust Robinson Humphrey downgraded to “neutral” from “buy” and lowered the target price from $72 to $67. The same decision applied to Barclays, reducing the price objective to $56 from $58.
Final comment
It is true that new product launches will make revenue more stable. Further, efficiency initiatives should help margin expansion in the future.
Last but not least, the firm obtains about 40% of its revenue from international operations. This means a significant exposure to currency risk, a factor that has impacted recent results.
Hedge fund sentiment seems to be neutral. While Pioneer Investments (Trades, Portfolio) and Andreas Halvorsen (Trades, Portfolio) have initiated new positions with 467,154 and 526,369 shares, other gurus like Ray Dalio (Trades, Portfolio) and Steven Cohen (Trades, Portfolio) sold out the stock in the last quarter.
Disclosure: Omar Venerio holds no position in any stocks mentioned.
