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Dover's Earnings Ahead of Estimates

Zacks Equity Research

Dover Corporation (DOV) reported first-quarter 2013 adjusted earnings from continuing operations of $1.10 per share, beating the Zacks Consensus Estimate of $1.08 and also exceeding the prior-year quarter’s earnings of $1.01 per share.

On a reported basis, earnings from continuing operations were $1.12 per share compared with the prior-year quarter earnings of $1.00. Earnings in the reported quarter include the impact of discrete tax items of 2 cents per share recognized in the current quarter and 1 cent per share recognized in the prior-year quarter.

Revenues and Margins

Total revenue was $2.04 billion in reported quarter, up 4% year over year, falling short of the Zacks Consensus Estimate of $2.09 billion. The growth includes a 6% contribution from acquisitions, offset by organic decline of 1% as well as a minor impact from foreign exchange.

Dover witnessed solid growth from its businesses serving the production and downstream energy markets and the consumer electronics market, which mitigated the anticipated revenue decline, driven by a lower North American rig count and reduced refrigeration activity, mainly associated with a major retailer as well as soft European industrial markets. Furthermore, Dover’s recent acquisition of Anthony International also contributed to the growth.

Cost of sales increased 5% to $1.26 billion in the quarter from $1.21 billion in the year-ago quarter. Gross profit went up 4% year over year to $776.6 million. Gross margin remained flat at 38% in the quarter. Operating profit remained flat at $292 million whereas operating margin contracted 60 basis points to 14.3%.

Segmental Performance

Revenues in the Communication Technologies segment rose 4% to $372.8 million. The segment’s income, however, dropped 5% year over year to $44.2 million.

Energy revenues increased 6% to $561 million in the quarter. The segment’s operating income increased 6% to $139.5 million.

Revenues in the Engineered Systems segment increased 6% to $867.9 million in the quarter. The segment’s income declined 4% to $117.2 million.

Printing & Identification segment revenues were $237.9 million in the quarter compared with $243.6 million in the prior-year quarter. The segment reported an operating income of $29.7 million, increasing 14% from $26.1 million a year ago.

Bookings and Backlog

The company ended the first quarter with bookings worth $2.214 billion versus $2.078 billion at the end of the first quarter of 2012. Backlog remained flat year over year at $1.64 billion at end of the reported quarter.

Cash Flows

The company generated cash flow from operating activities of $78.3 million in the reported quarter, down from $161.3 million in the prior-year quarter. Free cash flow was $31.2 million compared with $93.1 million in the prior-year quarter. Dover repurchased 4 million shares in the first quarter.

Outlook for 2013

Dover expects revenues to rise in the range of 7%-9% in 2013. This assumes organic revenue improvement of 3%-5% and a 4% contribution from acquisitions. The company expects earnings to be in the band of $5.05-$5.35 per share for 2013.

Our View

Dover will continue to benefit from its active acquisition pipeline, bookings and backlog growth, growth in the cell phone market. However, Dover’s Energy segment’s results are expected to be affected in the first half of fiscal 2013 due to a lower North American rig count. Furthermore, Dover has access to the volatile semiconductor and electronics end-markets through its Printing and Identification segment. The near-term outlook is bleak for semiconductor manufacturers. Furthermore, the segment’s results will also be affected given its above average exposure to Europe.

Dover currently retains a short-term Zacks Rank #3 (Hold). The Babcock & Wilcox Company (BWC), EnPro Industries, Inc. (NPO) and Tri-Tech Holding, Inc. (TRIT) with Zacks Rank #1 (Strong Buy), are more favorable options for investors keen on this industry.

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