The stock of Dover (NYSE:DOV, 30-year Financials) is estimated to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $137.93 per share and the market cap of $19.8 billion, Dover stock appears to be significantly overvalued. GF Value for Dover is shown in the chart below.
Because Dover is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 2.1% over the past three years and is estimated to grow 1.62% annually over the next three to five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Dover has a cash-to-debt ratio of 0.16, which which ranks worse than 88% of the companies in Industrial Products industry. The overall financial strength of Dover is 5 out of 10, which indicates that the financial strength of Dover is fair. This is the debt and cash of Dover over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Dover has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $6.7 billion and earnings of $4.7 a share. Its operating margin is 13.96%, which ranks better than 82% of the companies in Industrial Products industry. Overall, GuruFocus ranks the profitability of Dover at 7 out of 10, which indicates fair profitability. This is the revenue and net income of Dover over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Dover's 3-year average revenue growth rate is in the middle range of the companies in Industrial Products industry. Dover's 3-year average EBITDA growth rate is 0.8%, which ranks in the middle range of the companies in Industrial Products industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Dover's return on invested capital is 10.64, and its cost of capital is 8.77. The historical ROIC vs WACC comparison of Dover is shown below:
In summary, Dover (NYSE:DOV, 30-year Financials) stock appears to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks in the middle range of the companies in Industrial Products industry. To learn more about Dover stock, you can check out its 30-year Financials here.
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