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Morningstar | Dover Continues to Perform According to Our Long-Term Expectations

Nothing in narrow-moat-rated Dover’s second-quarter 2019 results alters our long-term view of the firm. As a result, we’re leaving the fundamental drivers in our model intact. That said, we plan to raise our fair value estimate by $1 to $94 per share (from $93 previously). The $1 raise is entirely attributable to the time value of money implicit in our discounted cash flow methodology. We also assume $5.82 of adjusted EPS for 2019, toward the high end of management’s recently tightened guidance. Reported sales were mostly flat year over year during the second quarter of 2019, mostly due to currency headwinds. Even so, Dover’s consolidated organic sales grew at a decent approximately 3% year over year.

Top-line growth was mostly driven by the firm’s Fluids segment, with organic revenue growing 7.5% year over year. The segment’s top-line was mostly driven by its fueling & transport subsegment, which posted organic growth of 8% year over year. Demand remains robust across all geographies for both underground and aboveground equipment systems in this subsegment. Europay, Mastercard and Visa demand, a key component of our Dover thesis, should continue to drive top-line growth, albeit at an inconsistent cadence.

Based on current activity levels, we expect adoption should continue well beyond 2020 and into the latter years of our five-year explicit forecast. The firm also recently announced a partnership with ABB, which we interpret as a bullish call on electrical vehicle adoption. The agreement contemplates that ABB will contribute chargers which Dover will then purchase and resell through both is distribution and direct customer network channels. We anticipate this sort of revenue will be higher-margin and take advantage of Dover’s sizable installed base, though it’s difficult to estimate the exact market opportunity at this time.

Offsets to Dover’s top-line results once again notably came from Dover’s refrigeration & food equipment segment. The segment saw its top line fall just over 4%, but these results were less pronounced on an organic basis (falling 3% year over year). While we believe this segment posts the firm’s strongest returns on invested capital, it’s continued to struggle growing over the past several quarters. This quarter’s sore spot was mostly refrigeration, which was a flip from the first quarter of 2019, which saw weakness in the food equipment business.

Despite friction costs flowing through, the more severe top-line weakness we previously witnessed in refrigeration has started to wane. Aside from weak refrigeration systems demand, the segment took it on the chin as a result of tougher trading conditions in Asia for heat exchangers. That said, we’re not changing our long-term fundamental outlook, which contemplates low-single-digit revenue growth year over year. We’re encouraged by what management sees as a significant increase in bookings on refrigerator cases and doors, specifically in food retail.

We wonder if Dover would consider offloading portions of its refrigeration and food retail segment. While Dover had previously stated after the departure of prior CEO Bob Livingston and the spin-off of Apergy that it was “done” reshaping its portfolio, the company appeared to open the door to remaking its portfolio. We base our assessment on Rich Tobin’s comments that Dover’s portfolio will look different five years from today. We will update investors as we hear more at Dover’s Investor Day, which we plan to attend in September here in Chicago.