Dover Corp. (NYSE:DOV) is one of the most heavily oil and gas-focused industrial companies on the market. For example, at the start of 2013 the company's energy segment generated more than 40% of total segmental earnings. No prizes for guessing that that figure is a lot lower now -- less than 14% in recent first-quarter results -- but the segment looks to be in recovery mode, and management's commentary on the earnings call reads across well for other companies with oil exposure. Let's look, then, at Dover's earnings.
Dover raises guidance
The first-quarter results saw management raise full-year revenue guidance to a range of 11% to 13%, from a previous range of 10%-12%, and full-year EPS guidance to a range of $4.05-$4.20, from $3.40-$3.60. The reason? There are a few:
- The proceeds of a disposition will add $0.35 to full-year EPS.
- An improvement in operational performance -- principally from energy, but to a lesser extent including the other three segments -- is forecast to add $0.29 to EPS.
All told, energy segment revenue is forecast to increase 20%-23% in 2017, up from an earlier estimate of 13%-16% in the fourth-quarter earnings. Clearly, that's good news for companies that Dover competes with in oil and gas, such as Weatherford International Plc, Schlumberger Limited, and General Electric Company. GE's oil and gas equipment orders rose 30% in its recently reported first quarter.
However, the good news for Dover doesn't end with energy, because full-year 2017 organic revenue guidance was raised across the board from what was given in the fourth quarter of 2016.
|Segment||At Q1 2017||At Q4 2016|
|Energy||13% to 16%||20% to 23%|
|Engineered Systems||1% to 3%||2% to 3%|
|Fluids||0% to 2%||1% to 2%|
|Refrigeration & Food Equipment||0% to 2%||1% to 3%|
|Total||3% to 5%||4% to 6%|
Refrigeration is also strong
Outside of energy, it's worth noting the particular strength in refrigeration. The refrigeration and food equipment segment grew organic bookings by 13% in the quarter, largely thanks to refrigeration. CEO Bob Livingston is assuming Dover will "pay that back a little bit here in the second quarter," but he also said that April order activity in refrigeration was reflective of orders in February and March. Clearly, there is a good chance of some upside to Dover's estimates for refrigeration in 2017.
|Segment||Q1 Reported Bookings Growth||Q1 Organic Bookings Growth|
|Refrigeration and food equipment||7%||13%|
Turning to Dover's valuation, the midpoint of EPS guidance puts it on a forward P/E ratio of around 19 times earnings, and guidance for free cash flow (FCF) at 11% of revenue means FCF could come in at around $836 million. That outlook gives it a forward FCF-to-enterprise value figure of 5.3%, which suggests to me that it's undervalued -- provided you agree with Dover's management assumption that WTI oil prices will average around $55 in 2017.
Moreover, in response to a question from UBS analyst Shannon O'Callaghan on the earnings call, Livingston outlined his belief that well completion activity would pick up in the second half. Well completion is simply the process whereby wells are prepared for production after drilling has taken place. Discussing recent trading, Livingston said, " We did see well completion activity increase during the first quarter, but at a much lower rate than we saw on the rate of change with respect to drilling activity". For reference, Schlumberger also saw "strong directional drilling activity in North America" in its first quarter.
Livingston then added that "we are expecting to see well completion activity pick up, especially in the second half of the year," and he suggested well completion activity would continue into 2018 and "perhaps even beyond" -- again, good news for the industry.
Dover exceeded expectations for oil and gas revenue and hinted at strong well completion activity to come, so investors in Weatherford and Schlumberger can expect end market conditions to be positive in 2017. Meanwhile, General Electric -- a company forced to reduce revenue growth expectations in 2016 because of weak oil and gas last year -- will also welcome stronger energy capital spending. All told, Dover's results suggest that oil and gas companies will report a good first quarter, while its own progress is impressive and the stock remains attractive for investors..