Dover Has Several Initiatives for Long Term Growth

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Oct 09, 2014

In this article, let's take a look at Dover Corp (DOV, Financial), a $12.61 billion market cap company, which is a company which manufactures a broad range of specialized industrial products and sophisticated manufacturing equipment.

Growth strategy

Dover's business mix consists of more than 40 separate businesses and even more products. With a more decentralized organizational structure, initiatives across the various businesses have resulted in better profitability.

The growth strategy is based on several initiatives, such as organic growth, strategic acquisitions, expansion and improving operating efficiency.

To drive organic growth, the company is focused on developing new products, providing superior customer service, implementing pricing initiatives and gaining market share.

The acquisition strategy is to acquire businesses with higher-than-average profit margins.The company acquires smaller businesses that it knows well. We believe it will continue acquiring at the same rate of the past. Of course if it continues growing it will become more and more difficult to maintain the rate and quality of growth, but taking into account size of the target, it is not expected deterioration in returns.

In the past two years, it spent more than $2.7 billion on 27 acquisitions, and divested only in one.

International markets

Additionally, it operates in international markets, generating about half of total revenues from non-domestic sources in 2012 (this is the last data we have). This is divided as follows: 18% from Asia, 15% from Europe, 10% from the Americas excluding domestic sales, and the rest from other regions.

Dover focuses on innovation and customer relationships, and will also make efforts to better its existing global operations to improve customer service.

Estimated one-year price

According to Yahoo! Finance, the estimated one-year target share price is $94, so if you buy shares at current market price ($76.76), your return from price appreciation would be 22.45%. In addition, you have to consider any cash flow received by the asset. So for holding the stock one year, you'll be paid a dividend of $1.6 at the end of the year. If we divide this number by current price per share, we obtain the dividend yield, which is the other component of the return on an investment for a stock, and in this case is 2.0%. So the total expected return for investing in Dover is 24.45%, which we believe is an attractive stock return.

Revenues, margins and profitability

Looking at profitability, revenue grew by 5.96% but earnings per share decreased in the most recent quarter compared to the same quarter a year ago ($1.29 vs $1.49). The gross profit margin is currently high at 42.82%. The net profit margin of 10.44% is above the industry average.

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker Company ROE (%)
DOV Dover Corp 17.97
PLL Pall Corporation 20.06
SNA Snap-on Inc 18.28
PH Parker Hannifin Corp 16.67
FLS Flowserve Corp 27.16
 Industry Median 7.49

The company has a current ROE of 17.97% which is higher than the one exhibit by the industry median and Parker Hannifin (PH, Financial).In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Pall Corporation (PALL), Snap-on Inc (SNA, Financial) and Flowserve (FLS, Financial) could be the options. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

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Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 15.7x, trading at a discount compared to an average of 23.5x for the industry. To use another metric, its price-to-book ratio of 3.3x indicates a premium versus the industry average of 1.79x while the price-to-sales ratio of 1.4x is above the industry average of 1.04x.

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Final comment

The firm focuses on businesses with higher margins and less capital-intensive. Further, the company is achieving better margins, while commodity prices ease. Moreover, it is expanding its activities in low-cost regions.

The PE relative valuation and the return on equity that significantly exceeds the industry average make me feel bullish on this stock.

Hedge fund gurus like Jeremy Grantham (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014, as well as Diamond Hill Capital (Trades, Portfolio).

Disclosure: Omar Venerio holds no position in any stocks mentioned