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Unpleasant Surprises Could Be In Store For Dover Corporation's (NYSE:DOV) Shares

Simply Wall St
·3 mins read

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider Dover Corporation (NYSE:DOV) as a stock to potentially avoid with its 24.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's lofty.

Recent times have been pleasing for Dover as its earnings have risen in spite of the market's earnings going into reverse. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Dover

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Keen to find out how analysts think Dover's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Dover's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Dover's to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 9.9% last year. EPS has also lifted 23% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Looking ahead now, EPS is anticipated to climb by 11% per annum during the coming three years according to the analysts following the company. With the market predicted to deliver 13% growth per annum, the company is positioned for a weaker earnings result.

With this information, we find it concerning that Dover is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Dover's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Dover's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 2 warning signs for Dover that we have uncovered.

If you're unsure about the strength of Dover's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.