Dover Corporation DOV has been displaying an impressive performance, aided by an upbeat outlook, improved performance by the Engineered Systems and Fluids segments, strong demand and solid backlog as well as cost-reduction initiatives. However, the coronavirus outbreak, slowdown in manufacturing activities and soft retail refrigeration demand are concerns.
Dover, based in New York, is an industrial conglomerate producing a wide range of specialized industrial products and manufacturing equipment. The company currently carries a Zacks Rank #3 (Hold) and has a VGM Score of B. Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) 2 (Buy) or 3, offer the best investment opportunities.
The stock has a long-term expected earnings per share growth rate of 11.5%, higher than the industry’s 10.1%.
Factors Favoring Dover
Dover’s first-quarter 2020 results are likely to reflect its robust order backlog as well as execution of margin targets. In addition, Engineered Products is expected to have grown on continued strength in waste handling, vehicle services, and aerospace and defense business. Imaging & Identification is likely to have benefited from improved outlook in Asia for both marking and coding, and textile printing.
The company projects current-year adjusted EPS at $6.20-$6.40 compared with the prior estimate of $5.75-$5.85. The guidance reflects robust order backlog across all business segments, productivity and cost-containment initiatives, and execution of margin targets.
Positive Earnings Surprise History
Dover outpaced the Zacks Consensus Estimate over the trailing four quarters, the average positive beat being 5.36%.
Looking at Dover’s price-to-earnings ratio, its shares are underpriced at the current level, which seems attractive for investors. The company has a trailing P/E ratio of 14.3, lower than the industry average of 16.
Growth Drivers in Place
Dover’s cost-reduction initiatives are likely to bolster its margins. The company has executed restructuring programs to better align costs and operations with the current market conditions through targeted facility consolidations, headcount reduction and other measures.
Dover has a long tradition of making successful acquisitions in diverse end markets. In 2019, the company acquired three businesses for a total consideration of $216.4 million. The company made these acquisitions to complement and expand upon the existing operations within the Fueling Solutions and Pumps & Process Solutions segments. This January, Dover completed the acquisition of Systech International. The buyout supports Dover’s marking and coding portfolio, and expands software and service revenues within Markem-Imaje business. The deal is expected to be accretive to the first-year adjusted EPS.
Recently, the company entered into an agreement to acquire Em-tec, in a bid to expand its presence in the biopharma market. This buyout will aid Dover to further expand its offerings into biopharma and other hygienic applications, while also boosting the company’s flow-control technologies portfolio with flow-rate sensors. Em-tec will be part of the Pump Solutions Group (PSG) business unit within Dover’s Pumps & Process Solutions segment following the deal’s closure. Moreover, the company has divested Chino branch of The AMS Group, a leading aftermarket refrigeration solutions and services provider business, to a private equity firm, PMC Capital Partners, LLC.
In addition, the company will gain from product digitization, e-commerce, product development and inorganic investment in core business platforms. The company has initiated several growth and productivity capital projects, and targets investments in can forming and heat-exchanger businesses to capture growing volumes and upgrade competitive capabilities.
Few Hurdles to Counter
The company’s global operations will likely be adversely impacted due to the coronavirus pandemic straining demand for its products, while overall slowdown in the manufacturing sector pose a threat. The U.S manufacturing sector is bearing the brunt of waning global demand and the U.S.-China trade tensions. Per the Institute for Supply Management, the U.S Purchasing Managers’ Index (PMI) remained below 50 (indicating contraction) for five months in a row till December. Although the index climbed above 50 in January and February, it has again contracted to 49.1% in March owing to the coronavirus outbreak.
Moreover, Dover’s Refrigeration & Food Equipment segment has been bearing the brunt of soft food and retail construction markets. The segment’s margin has been affected by lower volumes in the SWEP heat-exchanger business, particularly in Asia, and reduced refrigeration systems demand. Thus, weak refrigeration demand and lower shipments in Asia will likely dampen margins in the near term. Further, foreign-exchange headwinds might have hurt the company’s margins in the first quarter.
Investors might want to hold on to the stock, at present, as it has ample prospects for outperforming peers in the near future.
Dover, along with Tennant Company TNC and Chart Industries, Inc. GTLS, is part of the Manufacturing – General Industrial industry. The stock has depreciated 12.4% over the past year compared with the industry’s loss of 18.4%.
Stock to Consider
A better-ranked stock in the Industrial Products sector is Sharps Compliance Corp SMED, currently sporting a Zacks Rank of 1. You can see the complete list of today's Zacks #1 Rank stocks here.
Sharps Compliance has estimated projected earnings growth rate of 800% for 2020. So far this year, the company’s shares have surged 72%.
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