On May 29, we maintained our Neutral recommendation on Dover Corporation (DOV), based on expected benefits from its decision to spin off certain part of its communication technologies its active acquisition pipeline, bookings and orders growth. However, continued headwinds for the Printing and Identification and Energy segments remain a concern for this industrial conglomerate that produces a wide range of specialized industrial products and manufacturing equipment.
Why Reiterated?
Dover’s first-quarter 2012 adjusted earnings per share increased 9% to $1.10. Total revenue was $2.04 billion in reported quarter, up 4% year over year. The rise was driven by a 6% contribution from acquisitions, offset by organic decline of 1% as well as a minor impact from foreign exchange.
Dover’s expansion has been mainly driven by acquisitions. The company remains committed to its target of achieving annual organic sales growth of 4% to 6% in the next three years, aided by acquisition growth of 3% to 5%. In 2012, Dover made significant addition to its artificial lift portfolio (Production Control Services) and to the Fluid Solutions platform (Maag Pump Systems) and refrigeration (Anthony International). The company expects completed acquisitions to be accretive to its 2013 earnings by 13 cents to 16 cents, largely driven by Anthony.
Dover has recently decided to spin off certain part of its communication technologies businesses into a standalone, publicly traded company – Knowles. These businesses mainly manufactures microphones, speakers, receivers and other products used in smartphones. The company however will retain businesses in the communications technologies segment, which make components for aerospace and defense industries and fluid applications. The transaction is slated to be completed by 2014.
The communication technologies business was not exactly aligned with the industrial profile of Dover. This will simplify Dover’s business profile and enable it to focus on its key growth spaces – Energy, Fluids, Refrigeration & Food Equipment, and Printing & Identification. Following the spin-off, Dover's revenue in 2013 on a pro-forma basis is estimated at around $7.4 to $7.6 billion.
Dover's total bookings increased 7% year over year to $2.2 billion in the first quarter, driven by growth in Engineered Systems, Communication Technologies and Energy segment bookings. Orders increased 1.4% from the year-ago quarter and 12.4% sequentially. We expect the book to bill of 1.09x to boost organic growth in the second quarter.
On the flipside, Dover has significant exposure to domestic oil and gas production levels and rig counts through its Energy platform’s supply of consumables to the North American energy sector. The North American rig count declined 2.8% year over year in the first quarter. Even though Dover expects the North American rig count to continue to improve through the year and drive a higher rate of growth in the segment, rig count as of May 24, 2013, declined 11% year on year and was 1,762. The outlook for rig activity in North America continues to be uncertain and we thus await for an actual improvement in the rig count to drive growth in the Energy segment.
Furthermore, Dover has access to the volatile semiconductor and electronics end-markets through its Printing and Identification segment. The near-term outlook is bleak for semiconductor manufacturers. The segment’s results will also be affected given its above average exposure to Europe.
Other Stocks to Consider
Other stocks in the industry that are currently performing well and have a good visibility include Graco Inc. (GGG) with Zacks Rank #1 (Strong Buy), Altra Holdings, Inc. (AIMC) and Broadwind Energy, Inc. (BWEN) with Zacks Rank #2 (Buy).
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