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Dover (DOV) Aims for Leaner Portfolio, Separation Costs Ail

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We issued an updated research report on Dover Corporation DOV on May 11. The company will benefit from its efforts to simplify portfolio, share repurchases as well as strong momentum in its segments. However, separation costs pertaining to Apergy and continued weakness in Retail refrigeration remain headwinds.


Upbeat Q1 Performance


Dover delivered first-quarter 2018 adjusted earnings per share of $1.16, which increased 26% from the prior-year quarter, mainly driven by continued strength in businesses. Earnings also beat the Zacks Consensus Estimate of $1.13. Total revenues increased 6% year over year to $1.92 billion in the quarter, which surpassed the Zacks Consensus Estimate of $1.89 billion. The year-over-year increase can be attributed to acquisition growth of 1%, organic growth of 4%, and a favorable impact from foreign exchange of 4%, partly offset by an impact of 3% from dispositions.


Dover’s bookings at the end of the first quarter 2018 were worth $2.11 billion, up from $2.03 billion reported at the end of first-quarter 2017. Organic bookings increased across all of Dover’s businesses with the exception of Refrigeration & Food Equipment. Backlog increased to $1.41 billion at the end of the reported quarter from $1.29 billion at the year-ago quarter end. Backed by strong bookings growth, the company is poised for an improved second-quarter 2018 performance.


Upbeat 2018 Guidance Backed by Continued Momentum in Segments


For 2018, Dover guides adjusted earnings per share between $4.70 and $4.85, reflecting an increase of approximately 15% over the prior year. This guidance factors in full-year revenue growth of 4-5%, which is comprised of organic growth of 3-4%. Acquisitions will contribute around 1% to growth while favorable impact from foreign currency translation will add 3%. These benefits will be partially offset by an impact of 3% from dispositions. The guidance also includes the impact of incremental share repurchases and impact of tax reform.


Dover’s segments are poised for delivering growth in fiscal 2018. The company anticipates strong bookings in Engineered Systems and Fluids along with strong book-to-bill to drive organic revenues in 2018. Also marking and coding, digital printing and waste handling are expected to continue to performing well. In the Fluids segment, strong growth in the Pumps and hygienic and pharma businesses will drive results. Bearing and compression will be solid and retail fueling will sequentially improve. Within Refrigeration & Food Equipment, the company expects continued strong performance in heat exchangers and can-shaping equipment while retail refrigeration is anticipated to improve in the back half of the year as several customers step up the remodel activity.


A Leaner Portfolio Will Drive Growth


Dover persists with its efforts to simplify portfolio. In sync with this, the company has successfully completed the spin-off of its upstream energy businesses — Wellsite — which has been later named Apergy. Dover will now be a standalone company focused on industrial products and manufacturing equipment, while Apergy will be an independent public company. The Apergy spin-off is anticipated to enable Dover to concentrate on its less volatile core platforms by delivering innovative equipment and components, specialty systems, consumable supplies, software and digital solutions, and support services. Consequently, Dover's core platforms, which compete in lower volatility industrial markets, will be well poised to provide a strong foundation for reinvestment, long-term sustainable revenues, earnings growth and robust free cash flow generation.


Earlier, Dover sold the consumer and industrial winch business of Warn for $250 million in the fourth quarter-2017. The company also completed the sale of Performance Motorsports International, a manufacturer of pistons and other engine related components serving the motorsports and powersports markets, for total proceeds of $0.1 million in first-quarter 2017. These steps will aid the company in streamlining business by investing in market-leading platforms with strong margin profiles, resilience to market volatility and bright prospects. Dover is also reviewing cost structure to right size the company and boost margins. The company plans to achieve around $55 million of cost savings in 2018.


Headwinds Remain


Dover expects to incur separation costs related to Apergy in the second quarter of 2018 in between $33 million and $35 million. This will impact the quarter’s margins. Also, Retail refrigeration in the second quarter will continue to be hurt by tough comparisons related to last year's strong shipments and softer overall markets.



Dover underperformed its industry with respect to share price performance in the past year. The stock has dipped 5.1%, while the industry recorded growth of 9%.


Zacks Rank & Key Picks


Dover carries a Zacks Rank #3 (Hold). 


Some better-ranked stocks in the same sector include Applied Industrial Technologies, Inc. AIT, Graco Inc. GGG and IDEX Corporation IEX. While Applied Industrial Technologies and Graco sport a Zacks Rank #1 (Strong Buy), IDEX carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.


Applied Industrial Technologies has an expected long-term earnings growth rate of 12%. Its shares have gone up 13% in the past year.


Graco has an expected long-term earnings growth rate of 10%. The company’s shares have surged 24% in the past year.


IDEX has an expected long-term earnings growth rate of 11%. Its shares have appreciated 33% in the last year.


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