Dover (DOV 1.31%) is a diversified manufacturing company that makes products related to the design, manufacture and service of critical equipment and components for consumer goods, digital textile printing, vehicle service, environmental solutions, retail fueling, chemical, hygienic, oil and gas, power generation, commercial refrigeration, food equipment, and industrial end markets.
The company reported its quarterly earnings Oct. 17 and shared that it had 6% organic revenue growth, along with a 15% expansion in adjusted net earnings. Adjusted operating margin expanded 180 basis points, which the company attributed to volume leverage. The company's strong performance in the quarter allowed management to reaffirm its guidance, raising the bottom end of the range.
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Dover has very normal performance metrics
Dover's business runs with narrower margins than most of the large companies in the industrial products industry, which includes Honeywell (HON 0.32%), 3M (MMM 0.83%), Eaton (ETN 1.40%), Snap-on (SNA 1.00%), Illinois Tool Works (ITW 0.43%), Cummins (CMI 0.56%), Rockwell Automation (ROK 1.74%), and Emerson Electric (EMR 1.15%). The company's trailing 12-month operating margin of 13.8% is 130 basis points above the previous five-year average, though the industry average is 16.4%. Return on invested capital (ROIC) at 12.2% is similarly slightly below the 14.1% industry average, indicating that Dover is slightly less efficient than its peers at utilizing working capital to deliver returns.
Large industrials companies often have high financial leverage, which many investors seek to avoid with cyclical enterprises. Dover's 1.02 debt to equity is within range of its peers. Its interest coverage ratio of 7.82, 2.5 debt-to-EBITDA ratio, and 0.97 quick ratio all suggest limited risk related to liquidity and bankruptcy. Collectively, these metrics do not indicate any financial health problems at the company.
Downside risk is more attributable to cyclicality than valuation
Despite the recent price increase, Dover's valuation ratios are still reasonable. Its EV/EBITDA is 14.38, which is in line with the industrial products industry average. Its price-to-forward earnings ratio at 16.4, a 1.69 price to earnings growth ratio (PEG ratio), and 19.75 price-to-free cash flow ratio, are also all within the peer group range and near the average.
Industrial products companies rely upon capital expenditures by other companies, which rise and fall with management confidence, as well as the availability and cost of capital. During a recession, businesses spend less aggressively on equipment and machines used in the production and delivery of products, which makes equipment supply companies cyclical. From July 2007 to July 2009, Dover's stock tracked the S&P closely, falling 38% to the index's 42%. However, the stock's 1.47 beta is somewhat high, meaning investors might experience some enhanced downside risk in the event of a recession. It's not a recession-proof stock.
Its 1.86% dividend yield is exceeded by Honeywell, 3M, Eaton, Snap-on, Illinois Tool Works, Cummins, Rockwell Automation, and Emerson Electric. So income investors can find better-paying stocks among its peers. However, the company has, at times, engaged in significant share repurchasing, returning value to shareholders through anti-dilutive measures.
A growing company at a good price
Despite the recent price increase, it does not appear that Dover shares are overpriced. If there is a recession, it seems likely that the shares will fall substantially, along with other members of this cyclical industry. Investors who are bullish about the medium-term might view this as an appropriately priced entry point for an industrial company that should benefit from a growing global economy.
