EUR 850.00 For Business Accounts Only

Morningstar | Prior High-Quality Bargains Like Dover Are Often Here Today and Gone Tomorrow

Narrow-moat-rated Dover had a blowout fourth quarter that saw organic sales rise over 6% year over year amid general macroeconomic fears and a weak commercial refrigeration market. While we’re still concerned about a soft refrigeration market (which we suspect is mostly due to customer deferrals), and we think some of these benefits are circumstantial, we are pleased with the results. Dover shares traded as low as $66 per share on Christmas Eve and have rallied nearly 30% recently. We're raising our fair value estimate to $91 per share from $87 as we perform our annual model roll. We base our revised assessment on time value of money, new pension assumptions, and strength in the firm’s operations. We retain our narrow moat, stable trend, medium uncertainty, and Standard stewardship ratings.

First-year CEO Rich Tobin, a former Sergio Marchionne lieutenant, has wasted no time in attacking the firm’s selling, general, and administrative expenses. We already have a positive view on Tobin’s leadership and thought it was perfect timing for a change of the guard from prior CEO Bob Livingston after the Apergy spin-off. We think actions like SG&A rightsizing, which management expects will yield net benefits of $72 million during 2019 alone, should go a long way toward modest multiple expansion (Dover has traditionally traded at a relative discount to its peers). What’s more, most of these actions have already taken place, and Tobin is already moving on to Dover’s footprint-rationalization plans highlighted during the call. The firm held up Unified Brands (housed under its food equipment subsegment) as an ideal candidate to start these efforts, which we consider a positive, given slowing growth in this business.

One bit of color that stood out to us was the significant rise in capital expenditures relative to our prior expectations. For reference, management expects to increase capex to 3.1%-3.4% of revenue from just 2.4% the year prior. The latter figure is about par for the course in a typical year. These specific investments include multiple one-off investments like $26 million in a new greenfield facility, as well as $15 million in automation investments in food retail. Excluding these projects, capex would be relatively in line with historic levels. As such, we slowly model toward a much lower 2.3% by the end of our explicit forecast at the midcycle.

Management also updated its 2019 guidance, which includes organic revenue growth expectations of 2%-4% as well as adjusted EPS of $5.65-$5.85. Our own projections are at the top end of management’s top-line expectations as well as toward the upper end of consensus estimates. Even so, our adjusted EPS expectation of $5.67 is toward the bottom end of the announced range. Like many of its peers, the firm adjusts for restructurings and M&A transactions, among other items. By our count, however, its book/bill positively exceeded 1.0 across all its segments, which indicates the firm received more orders than it was able to fill. In fact, on the call, Tobin mentioned that concerns about supply chain overhangs have catalyzed customers to place advanced orders in order to receive any required deliveries during the first half.

We continue to believe that multiple secular trends like regulation concerning security, safety, and the environment will have a beneficial impact on Dover’s portfolio, and we reiterate our belief that the firm can increase its top line at a five-year compound annual growth rate of 4% during our model’s explicit forecast.