Image source: Getty Images.
What happened?
Dover Corp (DOV 1.06%) gave an investor presentation on Thursday confirming its 2016 guidance for EPS in the range of $3 to $3.05 and also initiating its 2017 outlook. It was a broadly positive, but not spotless, outlook, and investors in companies like General Electric Company (GE -0.53%) and AZZ Inc (AZZ 0.76%) can take heart from what was said about upstream oil spending.
Focusing on the 2017 guidance from Dover Corp:
- Revenue growth in the range of 10% to 12% is ahead of analyst estimates for 10%.
- Organic revenue growth of 3% to 5%.
- Diluted EPS in the range of $3.40 to $3.60 is below analyst estimates for $3.64.
While the earnings guidance is shy of analyst consensus, it's also important to focus on management's commentary:
- Early cycle oil markets (drilling and artificial lift, representing 9.5% of forecast 2017 revenue) are seeing an encouraging "start of a recovery."
- Printing and ID (around 13.6%) is experiencing "continued strong activity."
- Later cycle oil and gas markets remain soft.
- Management referred to "ongoing challenges in retail refrigeration" (14.5%).
Does it matter?
It's marginally positive for Dover Corp, but definitely positive for GE. On the plus side, the positive news of early-cycle oil and gas -- where Dover competes with GE -- is a reflection of the recovery in the U.S. rig count. Moreover, investors shouldn't be overly concerned with soft conditions in later-cycle markets such as automation (where GE also competes), because it usually follows a recovery in early-cycle spending.
U.S. Rig Count data by YCharts.
Investors might want to look at AZZ Inc, whose recent results were hit by weaker-than-expected oil and gas spending and the impact it's having on its galvanizing segment. If Dover's outlook is an accurate guide, then AZZ could eventually see a pull-through as oil producers start spending on galvanizing again, rather than merely using rigs stacked as a consequence of the slowdown. In other words, AZZ's post-earnings stock price dip could be a buying opportunity.
Turning back to Dover, on a less positive note, the difficulties in retail refrigeration -- largely due to production difficulties caused by an increase in customers -- haven't abated yet, and management's forecast for 0% to 2% growth mirrors the weak outlook given by competitors.
Looking ahead, investors will want to see Dover's energy segment hit its organic revenue growth target range of 13% to 16% for 2017 -- based on an assumption for an average U.S. rig count of 680 to 700 -- and some signs that the production difficulties in retail refrigeration are being dealt with.
