The modern world has been built by innumerable innovations. Many of them are products that require niche engineering and maintenance. It stands to reason, then, that many companies would eventually spring up with the sole purpose of providing the products and solutions needed to maintain said technologies working and to further innovate on them with the aim of achieving even greater efficiency over time. One such prospect in this market is Dover Corporation (NYSE: DOV). Over the past few years, management has been extremely successful in growing the business. This is true for both the top and the bottom of the business. Compared to their peers, the stocks appear to be trading slightly cheap. Although in the grand scheme of things, I’d say equities are probably closer to being fairly priced.
A diversified company
According to Dover’s management team, the company operations are divided into five different segments. The first of these is the engineered products segment. Through this, the company provides a wide range of equipment, components, software, solutions and services for a variety of markets such as vehicle aftermarket, waste management, industrial automation, aerospace and defense, etc. In the company’s 2021 fiscal year, this segment accounted for 22.5% of the company’s overall revenue and 17.2% of its profit. The next segment to pay attention to is called Clean Energy & Fueling. Through this, the company provides dedicated components, equipment, software and service solutions to enable the safe transport of traditional and clean fuels. It also deals with the transportation of hazardous substances and assists customers in the convenience retail, refueling and vehicle wash markets. In 2021, this segment accounted for 20.8% of the company’s overall revenue and 16.3% of its profit.
Next, we have the Imaging and Identification segment. It focuses on providing equipment for precision marking and coding, product traceability and digital textile printing, as well as other products such as consumables, software, etc., in the markets. world of packaged and consumer goods. Other customers include pharmaceutical space, industrial manufacturing companies, fashion companies, etc. This unit represented only 14.7% of sales last year and 14.3% of profits. The Pumps & Process Solutions segment, on the other hand, focuses on the production of specialized pumps and flow meters, fluid connection solutions, plastics and polymer processing equipment and other technologies dedicated to a wide variety of markets such as midstream and downstream oil and gas industry, biopharmaceutical production market, etc. Last year, this segment accounted for 21.6% of the company’s sales and 32.9% of its profits. Finally, we have the Climate & Sustainability Technologies segment, which focuses on equipment and systems dedicated to the commercial refrigeration, heating and cooling markets, as well as the beverage container manufacturing equipment markets. This unit accounted for 20.3% of sales and 19.4% of profits last year.
While these markets may not seem so attractive at first glance, management has been exceptionally successful in growing the business over the past few years. Between 2017 and 2019, for example, sales increased from $6.82 billion to $7.14 billion. Then, in 2020, sales dropped to $6.68 billion due to the COVID-19 pandemic. The good news is that sales have since rebounded, climbing to $7.91 billion in 2021. What’s more, that growth is expected to continue at least in the short term. During the first quarter in the company’s 2022 fiscal year, sales were $2.05 billion. This represents a 9.9% increase from the $1.87 billion generated a year earlier. This is in line with management’s expectations for the full year. Currently, they expect total revenue growth of between 8% and 10%. Of this, the lion’s share will come from organic growth, with a contribution of between 7% and 9% to the company’s turnover.
Overall, profitability was a bit mixed. But depending on which metric you’re looking at, the trend has been positive. Net income has been the most volatile, with earnings showing no clear trend and ranging from a low of $570.3 million in 2018 to a high of $1.12 billion last year. Operating cash flow is more consistent. After rising from $835.6 million in 2017 to $798.6 million a year later, it then began a steady increase, climbing to $1.12 billion in 2021. And finally, we have EBITDA. Between 2017 and 2019, this metric steadily increased from $1.15 billion to $1.33 billion. In 2020, it dipped slightly to $1.26 billion before jumping to an impressive $1.60 billion in 2021.
Even though the company expects to increase its turnover this year, unfortunately the same cannot be said for 2022. Inflation is expected to negatively affect the company to some extent, and this has proven to be clear. just by looking at the data for the first quarter of the year. . Net income during this period totaled $226.2 million. That’s down from the $232.8 million reported a year earlier. Operating cash flow also declined, from $177.2 million to just $23.7 million. However, if we adjust for changes in working capital, the metric is actually up so far this year, from $309.1 million in the first quarter of 2021 to $316.6 million in the same period. This year. And finally, we have EBITDA, which went from $394.1 million in the first quarter of last year to $390.3 million in the first quarter of this year.
For the full year 2022, management said earnings per share should be between $7.39 and $7.59. Although they also said non-GAAP earnings per share should be higher, between $8.45 and $8.65. Taking the GAAP earnings figure, that translates to a net profit of $1.08 billion. Applying that same year-over-year decline to EBITDA would give us a reading of $1.58 billion. Meanwhile, if we annualize adjusted operating cash flow for the business, that metric is expected to increase slightly year-over-year to around $1.14 billion.
By taking this data, we can easily evaluate the company. Using our 2021 results, the company is trading at a price/earnings multiple of 17.8. The price/operating cash flow multiple is 18, while the EV/EBITDA multiple is expected to be 14.3. If instead we were to rely on the 2022 estimates, these multiples should be 18.6, 17.5 and 14.4 respectively. To put that into perspective, I decided to compare the company to five similar companies. On a price/earnings basis, these companies ranged from a low of 11.7 to a high of 35.5. And using the EV to EBITDA approach, the range would be 11.6 to 21.5. In both of these scenarios, one of the five companies was cheaper than Dover. Meanwhile, using the price to operating cash flow approach, the range should be 21.1 to 30.1. In this case, Dover was the cheapest of the bunch.
|Company||Prizes / Earnings||Price / Operating Cash||EV / EBITDA|
|Stanley Black & Decker (SWK)||11.7||29.5||11.6|
|Ingersoll Rand (IR)||32.8||30.1||18.8|
Based on all the data provided, I can say that Dover has proven, time and time again, to be a quality operator in its markets. In the long term, I fully suspect the company will continue to grow. In the short term, it seems that the company will be partly affected by market conditions. Normally, I would say that such temporary weakness would be a good time to buy. But while the company’s shares are cheaper than those of similar companies, I think the company is much closer to being valued at fair value.