Dan Loeb Buys Activist Stake in Dover Corp in 3rd Quarter

Shares leap as Loeb announces he purchased stake

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Oct 20, 2017
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Daniel Loeb (Trades, Portfolio), leader of hedge fund Third Point, disclosed today in a shareholder letter that he purchased a stake in Dover Corp. (DOV, Financial) in the third quarter and proposed changes at the company.

Dover captured the activist investor’s attention as low crude oil prices weighing on its energy business drove underperformance at the industrial conglomerate. Loeb said he would push to separate that business, which the company had already been shopping since the summer.

The company updated investors in its third-quarter earnings results Oct. 19 that it planned to complete its search for separation options, including a spin-off, by the end of the year. It specifically wants to split with its upstream “Wellsite” business within its energy segment, which consists of Dover Artificial Lift, Dover Energy Automation and U.S. Synthetic.

Earnings at the energy segment have picked up in recent quarters compared to last year. In the third quarter, the company reported $51.94 million in earnings, compared to $13.28 million in the third quarter the prior year. Earnings through the third quarter to date rose to $146.995 million, compared to $55.336 million for the same period of 2016.

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In addition to the break with its energy business, Loeb also said he will pressure the company to remedy low margins in its “underearning core industrial portfolio,” where the majority of its earnings before interest and taxes derived from markets it dominated in market share but lagged in margins. In the past five years, Dover’s operating margins have declined at a rate of 6.8%, according to GuruFocus data.

“Earlier this summer, Dover took the first step to address this material underearning and issued a plan that calls for 300bps of margin improvement by 2019. While the market has largely ignored these targets given the company’s mixed execution track record, management has confidently reassured us of their commitment to these targets and is taking full accountability for their ability to meet them,” Loeb said.

Further, Loeb suggested the company address its capital allocation strategy:

“In today’s market, Dover’s industrial peers with strong capital deployment frameworks receive credit for forward cash generation. Dover has a similar opportunity – we believe the company needs to communicate a strategic vision, continue to optimize its portfolio around that vision, and set stringent M&A criteria. With a disciplined approach to capital allocation, we believe the market will begin to discount the >$4 billion of cash generation at Dover industrial over the next five years,” he said.

Dover’s share price jumped 5.25% Friday on news of Loeb’s involvement to $94.27 per share, pushing close to a 10-year high. Year to date, the shares advanced 26.7%. Its price-earnings ratio of 23.58 and price book ratio of 3.6 have both elevated to near 10-year highs, while its price-sales ratio of 1.93 hovers near a three-year high.

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Loeb’s strategies have generated returns that kept track with the bull market, with a year-to-date performance of 14.5% compared to 14.2% for the S&P 500. The investor boasts an annualized return of 15.8% since Third Point’s 1995 inception, doubling the S&P 500’s 7.9% gain.

As of second quarter end, Loeb's largest positions were in Baxter International (BAX, Financial), BlackRock (BLK, Financial) and Alibaba (BABA, Financial).