On Apr 11, 2015, Zacks Investment Research downgraded Dover Corporation DOV to a Zacks Rank #4 (Sell) from a Zacks Rank #3 (Hold) on lowered 2015 guidance.
Why the Downgrade
On Apr 9, Dover slashed its 2015 guidance based on negative impact of foreign currency translation, slower capital spending and challenging conditions in energy markets. Dover outlined its 2015 earnings expectation between $4.20 and $4.40 per share, down from the previous forcast of $4.70 and $4.95 – a reduction of 55 cents at the high end of the prior guidance and 50 cents at the low end. Approximately 20 cents of the full-year impact of this revised forecast will be reflected in the first quarter of 2015.
The company expects revenues for 2015 to decline 4% to 6% as against the prior forecast of 1% growth to a 2% decline. The projection includes organic revenue decline of 2% to 4% and a 4% negative impact from foreign currencies which will be partly offset by 2% growth from completed acquisitions. Dover remains concerned about the deterioration in the North American oil & gas markets and the U.S. dollar strength as against other currencies.
Dover’s energy platform supplies consumables to the North American energy sector. Hence, the fall in oil prices has been an overhang on the stock. The company expects the 2015 rig count to decrease by 25% to 30% year over year. Volatile raw-material costs and pricing pressure will remain threats to Dover’s performance. Further, slower-than-anticipated capital spending in the company’s core retail refrigeration end markets will result in lower full-year results than previously expected.
However, Dover is focused on restructuring operations to better align its cost base. In 2014, growth was offset by $44.8 million of restructuring charges. Of the restructuring charges, around $37 million was incurred in fourth-quarter 2014 principally for streamlining its business across the organization. Dover expects to incur restructuring charges of approximately $17 million to $20 million in the first quarter of 2015, a majority of which will be in the Energy segment. This increase in charges will lead to further contraction in margins.
Rising macroeconomic uncertainties and limited credit availability can deter capital spending which is an important sales driver for Dover's businesses. Volatile raw-material costs and pricing pressure will also put margins under pressure.
The negative sentiment has been reflected in the downward revision in analyst estimates over the past 90 days. The Zacks Consensus Estimate decreased 13.7% to $4.41 per share for 2015 and 10.6% to $4.97 for 2016.
Stocks to Consider
RBC Bearings Inc. ROLL, AO Smith Corp. AOS and Berry Plastics Group, Inc. BERY are some of the better-ranked stocks in the same industry. All three stocks carry a Zacks Rank #2 (Buy).
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