Dover Corp. (DOV) reported earnings today. The following excerpt from the press release summarizes the excellent quarter.
It was recently suggested that we prepare an article on Dover, and therefore felt it was appropriate to prepare this review on earnings day. Dover is a company that has been on our focus list for many years, but we have never actually invested in the stock. Although we were vaguely aware of this high-quality diversified industrial products and specialty systems company, there is a lot we didn't know. For example, we saw Dover as a cyclical company, and were therefore quite surprised to learn that it has rewarded shareholders with an increased dividend for over 55 years straight. Consequently, this factoid altered our perspective toward seeing Dover as a dividend growth stock rather than a cyclical stock.
In the same vein, it's amazing to us (with all humility we can muster) how much we can learn about a company by merely drawing a F.A.S.T. Graphs on it. The following 20-year earnings and price correlating graph on Dover instantaneously tells its story (*note that data is only provided for every other year on the 20-year graph due to space constraints). This is a company that generates extended periods of growth, occasionally interrupted with bouts of cyclicality (earnings drops). This graphic evidence could lead one to conclude that the best time to purchase this high-quality diversified manufacturer is right after periods of earnings weakness. These earnings interruptions tend to recover very quickly, and the stock price follows the recovery.
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When you examine the performance associated with the above graph, you discover that long-term earnings growth highly correlates to long-term shareholder returns. Since 1992, Dover grew earnings at the rate of 12.9%, and shareholders were provided and annualized total rate of return, including dividends, of 10.8%. The minor difference can be explained by modest overvaluation at the beginning of 1992. But our main point is the undeniable relationship between earnings, valuation and long-term shareholder returns.
Dover is a diversified global manufacturer of products and components serving numerous industrial and commercial markets. These would include product identification, energy, material handling, electronic components and equipment, mobile equipment, fluid solutions and engineered products. According to its fact sheet, Dover Corp. organizes its businesses into four operating segments and six operating platforms as follows:
- The industrial products segment which includes the two platforms; material handling and mobile equipment.
- The engineered systems segment which includes the two platforms; product identification and engineered products.
- The fluid management segment which includes the two platforms; energy and fluid solutions.
- The electronic technologies segment.
What we found most fascinating about Dover’s operating philosophy is how it is able to balance the leveraging of its scale while simultaneously operating under a decentralized management system. Dover grows its business by strategically allocating capital under a disciplined process of strategic acquisitions in numerous niche markets. With the home-office focused on allocating capital, individual subsidiaries are free to operate independently.
With so many diverse businesses, attempting to micromanage them at the highest level would dilute the individual businesses’ expertise and flexibility. On the other hand, these benefits do come at the cost of duplicating functions that a centralized management system could eliminate. Therefore, overall operating expenses can be higher than they need to be, but operating execution and customer service is enhanced.
In its presentation at the Deutsche Bank Securities Inc. Global Industrials and Basic Materials Conference in Chicago Illinois on June 16, 2011, Dover Corp. outlined its financial goals for the next three years. The following slides from that conference summarize their expectations:
Five Areas of Growth
This slide illustrates five areas where Dover believes the prospects for growth are strong. Combined, these five areas represent approximately 60% of revenues and 70% of segment earnings.
The Greatest Tailwinds Supporting Growth
This slide reports the areas where Dover Corp feels the greatest tailwinds supporting its expected growth lie. Currently, Dover Corp. derives approximately 55% of its sales from overseas. Therefore, it expects great growth and sees large opportunities in the BRIC countries of Brazil, Russia, India and China.
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Dover expects future growth to come from a combination of organic growth complemented by acquisition. Furthermore, it has a goal of expanding margins to 17% to 18% by 2013 and generate free cash flow of 10% of revenue.
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The above slides closely correlate to and therefore corroborate the consensus estimated future earnings growth of leading analysts following the company. Therefore, the current PE ratio of 16.5 indicates attractive valuation for this high-quality diversified conglomerate.
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Dover Corporation is a high-quality conglomerate that owns a largely diversified group of businesses that are leaders in their various niche markets. Today's earnings report not only beat the consensus expectations, it was also significantly better than what it suggested at the Deutsche Bank conference in June. Historically, this company has strung together several years of earnings and cash flow growth coming out of recessions. Calendar years 2010 and 2011 appear to be the beginning of their next streak. The following graphs overlay operating cash flows (the light green shaded area marked with an “o”) and free cash flow (the orange shaded area marked with an “f”) along with earnings.
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This all adds up to the potential that Dover offers an attractive long-term investment with above-average growth coupled with an increasing dividend income stream. Even though Dover displays periodic bouts of earning cyclicality, it has raised its dividend every year for 55 years running. Consequently, even though the current yield of 1.6% is less than some like, the long-term growth yield (yield on cost) potential is worth considering. At today's levels we believe Dover represents an attractive opportunity for the growth investor and the dividend growth investor seeking an above-average long-term total return.
(Watch this video for a live interactive version of the above presentation.)
Disclosure: No positions at the time of writing.
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.