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Morningstar | Dover Posts Exceptional 1Q Results; We Raise Our FVE to $93. See Updated Analyst Note from 22 Apr 2019

Narrow-moat-rated Dover posted an exceptional first quarter to open 2019, but nothing in the results materially alters our fundamental long-term view of the firm. However, we are raising our fair value estimate to $93 per share from $91. Aside from about a $1 increase due to the time value of money, we made some slight increases to our near-term fluid segment organic growth assumptions as well as slightly higher margin assumptions in the engineering systems segment, offset by top-line weakness in the refrigeration and food equipment segment. We also increased our 2019 adjusted earnings per share estimate to $5.82 from $5.67 as a result of these near-term changes after management raised portions of its top-line guidance.

While the stock continues to trade at the lower end of 2019 earnings multiples compared with peers and previously traded at 4 stars after the spin-off of Apergy and at the end of December, we no longer believe the stock represents a compelling discount to intrinsic value, as indicated by our current 3-star rating. Even so, the company continues to post strong near-term results and confirms our thesis that new management under Rich Tobin would drive shareholder value from cost structure and productivity initiatives.The firm revved top-line organic growth to an impressive 8.3% year over year in the first quarter. This was no doubt helped by a compelling performance in the fluid segment, which posted 15.1% year-over-year organic growth (12% reported, which was mostly offset by strong currency headwinds).

One item we’re watching closely is the U.S. migration toward chipped card global payment processing standards (or EMV, for Europay, Mastercard, and Visa) and its effect on Dover’s fueling station products; these are sold at Dover through Wayne EMV Solutions. According to information from Visa from 2018, about 68% of total merchants can process EMV chips. On the earnings call, Tobin commented on one item that’s been different in terms of Dover’s EMV build-out--specifically, Dover has been shipping more full dispenser units than kits, which has translated to additional revenue for the firm. However, we expect a tough comparison going into the fourth quarter of 2019, given Dover’s outsize prior-year performance. Even so, we expect this to continue to be a positive albeit decelerating catalyst for Dover’s stock over the near term.

The engineering systems segment also posted strong top-line organic growth at 5.8% year over year (offset by 3.5% year-over-year currency headwinds). This was led by the firm’s printing and identification business, which saw double-digit growth in digital printing. This is another important aspect of our thesis, since digital printing only accounts for about 5% of print and packaging volume worldwide. We’re also encouraged that the refrigeration and food equipment segment has started to reverse its negative organic growth, with backlog noticeably increasing from the prior year (10%, by our count).

Finally, the firm completed the divestiture of Finder, which continues management’s stated intent of divesting its portfolio’s exposure to upstream oil and gas that began with last year’s spin-off of Apergy. The firm recorded a loss on sale of $47 million for the quarter, which mostly reflects a write-off of intangibles as well as the elimination of an accumulated foreign-exchange translation adjustment as required by accounting standards. We like this portfolio move, given management’s comments that the business was negatively affecting returns on invested capital, and we like that new management continues to manage the firm through the lens of value creation.