Dover Corp. (DOV 0.35%) is making solid progress on its long march to value, but the company still has a lot of work to do. If that sounds boring, then consider that the stock is up nearly 38% year to date as I write. Dover isn't the highest-quality company out there, but CEO Rich Tobin has been steadily restructuring the business, and if the company can hit its targets, then the stock still looks like a good value. Let's take a look at the investment thesis in the light of its most recent earnings report.
The investment thesis for Dover
To quickly sum up the case for buying Dover stock, Tobin plans to generate significant cost savings, and reinvest some of that saved cash in growing the business. The plan is to cut $130 million from its selling, general and administrative costs (SG&A), and earmark $30 million of that for reinvestment. For reference, the company's SG&A costs were $1.716 billion in 2018.
Image source: Getty Images.
Of particular note, management plans to realign the strategy and manufacturing footprint of its underperforming retail fueling business (fluids segment) in Europe, and downsize its retail refrigeration operations (refrigeration and food equipment segment) in response to weaker-than-expected demand. Tobin spoke on those matters at an investment conference in March, where he noted that improving performance in the retail refueling segment was a "self-help" issue, while solving retail refrigeration's difficulties would also require some help on the customer side of the equation.
Ultimately, management believes Dover can be generating operational free cash flow (FCF) equivalent to around 10% of its revenue in a few years. Based on estimates for $7.21 billion in revenue for 2019, and its current market cap of $14.21 billion, that would give the company a market-cap-to-FCF ratio of around 19.7 -- that's not bad for a company that could exit its restructuring period with materially higher margin and FCF generation.
That said, is Dover on track in 2019?
Dover Corporation first-quarter earnings
In his initial remarks during the earnings call, Tobin summarized matters this way:
We are delivering on our cost programs. Incremental margins on volume was, for the most part, solid, and we are pleased with the bookings increase in Refrigeration and Food Equipment segment.
In fact, Dover increased its full-year guidance for organic revenue growth in engineered systems and fluids, resulting in a hike in total revenue guidance for 2019, but left its full-year EPS guidance range at $5.65 to $5.85.
Tobin was asked why earnings guidance wasn't changed. "We are clearly tracking toward the top-end of the range at this point," he said, later adding, "We'd like to get another quarter under our belt, so we get some visibility into Q4."
| Segment |
Current Organic Revenue Growth Guidance |
Previous Organic Revenue Growth Guidance |
2018 Segment Profit Guidance |
|---|---|---|---|
|
Engineered systems |
4%-5% |
3%-4% |
$451.3 million |
|
Fluids |
4%-5% |
3%-4% |
$389.8 million |
|
Refrigeration and food equipment |
1%-3% |
1%-3% |
$136.1 million |
|
Total revenue |
3%-5% |
2%-4% |
$977.2 million |
Data source: Company presentations.
That cautious tone was extended into the discussion of one of the two problem areas for Dover, namely retail refrigeration. "For the first time in six quarters, the backlog is up and our revenue went up," said Tobin. However, he noted, "I think that we've still got a lot of work to do, to see what that means in terms of kind of pre-industrialization margin performance." He also said he was "cautious because we don't have a lot of visibility into the second half."
Turning to the other problem area, namely manufacturing efficiency issues at Dover Fueling Solutions, the CEO lauded the ability of the business to deliver units at a better-than-expected rate in Q1, but also said "Not so good news is the margin conversion and that volume is not entirely satisfactory."
Clearly, there are signs of operational progress in retail fueling and refrigeration, but there's still more work to do on those fronts.
What it means to investors
All told, it was a broadly positive report from a top-line perspective, despite management's cautionary tone and commentary on the company's execution.
The revenue guidance hike was good news, but it needs to be matched by an earnings guidance increase. This stock still looks like a good value, but investors will want to keep an eye on the order book in coming quarters: What happens there will tell them how confident they can be in the prospects for further strong increases in Dover's share price in 2019.
