Why Investors Should Look More Favorably at Dover Corporation

Dover Corporation (NYSE: DOV  ) recently released its first set of quarterly results since the spin-off of its former communication technologies segment, Knowles Corporation (NYSE: KN  ) . The report was impressive for three key reasons, and Fools should start to think about upgrading their expectations for the company. Here's why.

Bye, bye, Knowles Corporation
The first two factors relate to the spin-off of Knowles Corporation, how it changes the investment proposition with Dover Corporation and, ultimately, the ability of Dover's management to initiate expansion opportunities.

First, the spin-off will remove the vagaries of the handset market from potential Dover Corporation investors. Usually, when thinking about an industrial conglomerate, one needs to compare a host of investing options, all with their individual specific end markets. However, they all tend to be tied to general trends in industrial spending. 

On the other hand, with Dover Corporation's communication technologies segment (Knowles), Foolish investors were almost forced into taking a view on which handset manufacturer would be hot this year. For example, Nokia and Blackberry used to be major customers of Knowles, but now, Apple and Samsung respectively account for 25% and 15% of its revenue. Investors trying to predict trends in the handset market add a layer of uncertainty and risk to a stock's proposition. Following the spin-off, Fools can now focus on Dover's four industrial and energy segments.

The second reason is that the Knowles spin-off will allow Dover's management to focus resources on its four main segments. Below is a table of how Dover's management is trying to expand market opportunities for each segment based on information interpolated from the outline given on the company's recent conference call.

Segment Share of 2013 Segmental Revenue Expansion Opportunity
Energy 34.0% international
Engineered Systems 29.6% printing and ID sales to new industry verticals
Fluids 16.6% international
Refrigeration & Food 19.8% new products that enhance customers productivity

Data source: Dover Corporation Presentations

The international expansion plans are particularly important because growth prospects look better for oil exploration outside of North America for 2014. For example, oil services company Baker Hughes (NYSE: BHI  ) recently forecast that the overall U.S. rig count would rise only 4% in 2014, versus a 9% increase internationally. Interestingly, Baker Hughes is predicting that this figure will average 1830, while Dover's management discussed a figure of "almost 1800."

The following chart graphs the U.S rig data from Baker Hughes:

US Rotary Rigs Chart

U.S. Rotary Rigs data by YCharts

The recent pick-up in U.S. rig activity is welcome, but Dover needs to follow the greater growth in international markets.

Dover Corporations's free cash flow, and improving trends
The third reason is that Dover's free cash flow conversion is improving. In the past, the company has consistently converted around 10% of its revenue into free cash flow, but on the conference call, President and CEO Bob Livingston said that he "felt confident" about 11% conversion for 2014, and "in the long run," too.

This point is significant if you consider that the company is currently trading at a relatively high enterprise value (market cap plus debt) to revenue ratio. If free cash flow conversion is now 10% higher, a rough rule of thumb could see the ceiling to the graphed ratio increased by 10% to say, 1.9 times sales.

DOV EV to Revenues (TTM) Chart

DOV EV to Revenues (TTM) data by YCharts

Granted, this doesn't make the stock look cheap right now, but it does suggest that the stock is worth looking at given any weakness from the current price.

The bottom line
Dover Corporation doesn't look like a compelling value, but the company has aspirations for growth now that the spin-off of Knowles Corporation has taken place. In addition, its forecast of 6%-7% revenue growth (with 3%-4% coming organically), may prove a bit conservative if Baker Hughes' forecast for the U.S. rig count is more accurate than Dover Corporation's estimate. Moreover, an improving industrial economy will help Dover. All told, it's not a raging buy, but investors should increase their expectations for the company.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2931430, ~/Articles/ArticleHandler.aspx, 10/26/2014 1:20:03 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement