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, weak retail refrigeration demand and input-cost inflation due to the tariff impositions remain concerns.
Factors Favoring Dover
Dover’s fourth-quarter 2019 results are likely to reflect its robust order backlog as well as execution of margin targets. In addition, impressive performance in the Engineered Systems and Fluids segments, along with benefits from cost-containment actions, footprint-optimization projects and retail refrigeration, are likely to have negated the impact of soft demand in the Refrigeration & Food Equipment segment.
The company projected adjusted EPS at $5.82-$5.85 for 2019. The mid-point of the guidance suggests 17% year-over-year growth. The guidance reflects solid order backlog across all business segments, productivity and cost initiatives, and execution of margin targets.
Positive Earnings Surprise History
Dover outpaced the Zacks Consensus Estimate over the trailing four quarters, the average positive earnings surprise being 6.7%.
The stock has appreciated around 65.2% over the past year, outperforming the industry’s growth of 39%.
Strong Earnings Growth Prospect
The Zacks Consensus Estimate for Dover’s 2020 earnings is currently pegged at $6.29, reflecting expected year-over-year growth of 7.6%. Also, the stock has a long-term expected earnings per share growth rate of 11.5%.
Looking at Dover’s price-to-earnings ratio, shares are underpriced at the current level, which seems attractive for investors. The company has a trailing P/E ratio of 19.8, which is lower than the industry average of 22.4.
Growth Drivers in Place
Dover continues its efforts to simplify the company’s portfolio and increase focus on markets with growth prospects. In sync with this, it has completed the spin-off of the upstream energy businesses. Following the spin-off, the company no longer owns the Energy segment and is aligned into three reportable segments. Consequently, Dover's core platforms, which compete in lower volatility industrial markets, will be well poised to provide a robust foundation for reinvestment, long-term sustainable revenues, earnings growth and strong free cash-flow generation.
Dover’s cost-reduction initiatives are likely to boost 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 also has a long tradition of making successful acquisitions in diverse end markets. Moreover, the company will gain from product digitization, e-commerce, new product development, and inorganic investment in core business platforms.
Few Hurdles to Counter
Tariff impositions on steel and aluminum products have led to higher input costs for Dover. Additionally, Dover’s Refrigeration & Food Equipment segment has been bearing the brunt of soft retail refrigeration markets. The segment’s margin has been affected by lower volumes in the SWEP heat exchanger business, notably in Asia and reduced refrigeration systems demand. Thus, weak refrigeration demand and lower shipments in Asia will likely dampen margins in the near term. Considering these, Dover’s Refrigeration & Food Equipment segment revenues will likely remain soft.
Investors might want to hold on to the stock, at present, as it has ample prospects for outperforming peers in the near future.
Zacks Rank & Stocks to Consider
Dover currently carries a Zacks Rank #3 (Hold)
Some better-ranked stocks in the Industrial Products sector are CIRCOR International, Inc. CIR, Chart Industries, Inc. GTLS and DXP Enterprises, Inc. DXPE. While CIRCOR International sports a Zacks Rank #1 (Strong Buy), Chart Industries and DXP Enterprises carry a Zacks Rank #2 (Buy), at present. You can see the complete list of today's Zacks #1 Rank stocks here.
CIRCOR International has an expected earnings growth rate of 59.3% for the current year. The stock has surged 114.2% over the past year.
Chart Industries has a projected earnings growth rate of 73.6% for 2020. The company’s shares have gained 6% over the past year.
DXP Enterprises has an estimated earnings growth rate of 10.5% for the ongoing year. In a year’s time, the company’s shares have appreciated 37.3%.
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