Dover Corporation NEUTRAL ZACKS CONSENSUS ESTIMATES (DOV-NYSE) SUMMARY

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1 March 09, 2015 Dover Corporation Current Recommendation Prior Recommendation Outperform Date of Last Change 01/11/2011 Current Price (03/06/15) $70.71 Target Price $74.00 NEUTRAL SUMMARY (DOV-NYSE) In the fourth-quarter 2014, Dover s adjusted earnings grew 2% year over year to $1.01 per share, driven by revenue growth across all segments and strong volume leverage. Earnings also beat the Zacks Consensus Estimate. Total revenue rose 11% year over year to $2 billion but missed the Zacks Consensus Estimate. For 2015, Dover trimmed its adjusted earnings per share outlook to between $4.70 and $4.95 and expects total revenue growth of 1% to 2%. The guidance primarily considers lower oil prices, discontinued operations and foreign exchange volatility. However, Dover will continue to grow on strong dynamics in industrial platform, improved capital allocation discipline, share repurchase activity and acquisitions. Hence, we have maintained our Neutral recommendation on the stock with a target price of $74. SUMMARY DATA 52-Week High $ Week Low $67.76 One-Year Return (%) Beta 1.47 Average Daily Volume (sh) 1,337,375 Shares Outstanding (mil) 163 Market Capitalization ($mil) $11,526 Short Interest Ratio (days) 4.82 Institutional Ownership (%) 88 Insider Ownership (%) 1 Annual Cash Dividend $1.60 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 5.5 Earnings Per Share (%) 14.0 Dividend (%) 10.1 using TTM EPS 15.6 using 2015 Estimate 14.9 using 2016 Estimate 14.0 Zacks Rank *: Short Term 1 3 months outlook 4 - Sell * Definition / Disclosure on last page Risk Level * Below Avg., Type of Stock Large-Blend Industry Mach-Genl Indl Zacks Industry Rank * 238 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) ,682 A 1,837 A 1,851 A 1,786 A 7,155 A ,803 A 1,963 A 2,010 A 1,978 A 7,753 E ,865 E 1,984 E 2,010 E 1,912 E 7,771 E ,919 E Note: Quarterly figures for 2013 & 2014 will not add up due to rounding off. Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.89 A $1.08 A $1.20 A $0.99 A $4.14 A 2014 $0.97 A $1.25 A $1.31 A $1.01 A $4.54 E 2015 $0.94 E $1.31 E $1.37 E $1.14 E $4.76 E 2016 $5.05 E Note: Quarterly figures for 2013 will not add up due to a one-time curtailment gain recognized in connection with the freeze of the company's defined benefit pension plans. Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Incorporated in 1955, New York-based Dover Corporation (DOV) is an industrial conglomerate producing a wide range of specialized industrial products and manufacturing equipment. It operates primarily in the U.S. and has subsidiaries and affiliates in Canada, France, Germany, the Netherlands, Sweden, China and the United Kingdom. Dover caters to a diverse clientele, principally spread across the Americas, Europe and Asia. The company operates its business under four segments Fluids (18% of total revenue in 2014) segment serves the Fluid Transfer and Pumps end markets. The division also focuses on the safe handling of critical fluids across the retail fueling, chemical, hygienic, and industrial end markets. Engineered Systems (31%) segment is comprised of two platforms, Printing & Identification and Industrials. The segment focuses on the design, manufacture and service of critical equipment and components serving the printing and identification, vehicle service, environmental solutions and industrial end markets. Energy (26%) segment is a provider of customer-driven solutions and services for safe and efficient production and processing of oil, natural gas liquids, and gas worldwide. It has a strong presence in the bearings and compression components markets and serves the Drilling & Production, Bearings & Compression and Automation end markets. Refrigeration & Food Equipment (25%) segment serves the Refrigeration and Food Equipment end markets and provides innovative and energy efficient equipment and systems serving the commercial refrigeration and food service industries. Equity Research DOV Page 2

3 REASONS TO BUY Dover has a long-standing history of making successful acquisitions in diverse end-markets. In early 2014, Dover acquired MS Printing Solutions S.r.l. in order to expand its Printing and Identification segment beyond the fast moving consumer goods and industrial markets by entering into the textile market. On Jul 30, Dover s Energy segment acquired The WellMark Company, which will add complementary products and also expand Dover s geographic coverage of valve, chemical injection pump and controls offerings. Further, in Aug 2014, Dover s Fluids segment acquired Liquip International. On Oct 2, Dover took over Accelerated Companies to bolster its position in the U.S. shale market. The impact of completed acquisitions on earnings will be $0.01 to $0.03 per share in Further acquisitions will drive long-term growth. In Engineered Systems, Dover anticipates continued growth driven by strong dynamics in industrial platform and global growth in printing and identification. Regarding Fluids, Dover believes the solid global markets will continue for pumps and fluid transfer businesses, supported by increased safety and environmental regulations, a positive retail fueling environment and product introductions. Finally, Refrigeration and Food Equipment is expected to grow based on Dover s focus on customer service and best-in-class products. The company will grow in 2015 through innovative products like CO2 systems and heat exchangers. Dover's transition from a portfolio company into an integrated enterprise through supply chain rationalization, improved capital allocation discipline (including selective divestitures), and more structured best practices will drive growth and improve returns. In line with its strategy of focusing on the core business, Dover has sold its Datamax O'Neil unit to Honeywell International Inc. for $185 million on Mar 2, The divestiture, which mainly pertains to workforce reductions and efforts to consolidate its manufacturing footprint, is expected to lead to over $50 million in annualized benefits. The estimated savings, utilization of sale proceeds to fund share repurchases and growth opportunities will boost the stock. Dover's total bookings increased 7.8% year over year to $7.8 billion in 2014 driven by higher bookings in Fluids (14%), Energy (9%) and Engineered Systems (11%), while Refrigeration & Food Equipment segment s bookings declined (1%). The company will continue to benefit from bookings and order growth in the coming quarters. Further, Dover repurchased 2.7 million shares for $208 million in the fourth quarter. For 2014, the company repurchased 7.5 million shares for $601 million. Dover recently put a new standing authorization in place and expects to repurchase $600 million worth of shares in REASONS TO SELL For 2015, Dover trimmed its full-year adjusted earnings per share outlook in the range of $4.70 to $4.95, a $0.35 decline from the previous guidance. Dover now expects total revenue growth of 1% to -2%, which mainly reflects new Energy revenue estimate of -6% to -9%, a 15 point reduction from the prior forecast. Within total revenue forecast, organic growth is anticipated to be approximately 1% to - 2%, completed acquisitions will contribute to approximately 2% growth and foreign exchange is expected to be a 2% headwind. The guidance primarily considers the impact of lower oil prices, discontinued operations, share repurchase activity and foreign exchange volatility. Dover has significant exposure to domestic oil and gas production levels and rig counts through its energy platform s supply of consumables to the North American energy sector. Hence, the recent fall in oil prices remains a matter of concern. The company also expects 2015 rig count to decrease by a Equity Research DOV Page 3

4 year over year average of 25% to 30%. Further, Dover s margins contracted in fourth-quarter Volatile raw-material costs and pricing pressure will remain threats for margins. Rising macroeconomic uncertainties and limited credit availability can deter capital spending which is an important sales driver for Dover's businesses. Additonally, Dover's businesses are dependent on sustained growth in emerging economies (such as China and India). Expanding production in lowercost countries can increase exposure to political and monetary instability, adverse changes in government regulations and relatively weaker enforcement of intellectual property rights. RECENT NEWS Dover (DOV) Beats on Q4 Earnings, Lowers 2015 Outlook Jan 27, 2015 Dover reported fourth-quarter 2014 adjusted earnings from continuing operations of $1.01 per share, which increased 2% from the prior-year quarter earnings of $0.99 per share driven by revenue growth across all segments and strong volume leverage. Earnings also beat the Zacks Consensus Estimate of $0.95 per share. Including one-time items, earnings from continuing operations were $1.03 per share, which rose 3% from $1 per share earned in the prior-year quarter. Earnings for the quarter include tax benefits of $0.02 per share, while in the year-ago quarter it included tax benefits of $0.01 per share. Revenues and Margins Total revenue rose 11% year on year to $2 billion in the quarter. However, revenues missed the Zacks Consensus Estimate of $2.04 billion. The year-over-year rise includes 6% contribution from organic growth and 7% from acquisitions, partially offset by a 2% impact of unfavorable foreign exchange. Cost of sales increased 13.4% to $1.25 billion in the quarter from $1.11 billion in the year-ago quarter. Gross profit went up 6.5% year over year to $724 million, whereas gross margin decreased 140 basis points (bps) to 36.6%. Selling, general and administrative expenses increased 11.6% year over year to $460.4 million. Operating profit in the reported quarter decreased 1.4% to $263.5 million from $267 million in the yearago quarter. Operating margin contracted 170 basis points (bps) to 13.2% in the quarter. Segmental Performance Energy revenues improved 20% to $550 million in the quarter. The segment s operating income declined 6.3% year over year to $105 million. Revenues in the Engineered Systems segment increased 6% to $592 million in the quarter. The segment s income improved 6.6% year over year to $93 million. Revenues in the Fluids segment rose 10% year over year to $377.5 million in the reported quarter. The segment s income increased 14.4% year over year to $63 million. Refrigeration & Food Equipment segment revenues increased to $458.5 million in the quarter compared with $426.5 million in the prior-year quarter. The segment reported operating income of $30.9 million, declining from $46.6 million a year ago. Equity Research DOV Page 4

5 Bookings and Backlog The company ended 2014 with bookings worth $7.76 billion, which grew 7.8% from $7.19 billion at the end of Backlog increased 10% to $5.25 billion in 2014 from $4.77 billion at the end of Fiscal 2014 Performance Dover posted adjusted earnings of $4.54 per share for 2014, which increased 10% from $4.14 a share in Earnings, however, missed the Zacks Consensus Estimate of $4.60. Including special items, earnings were $4.61 per share for the year, flat with $4.60 in Revenues for the full year increased 8% year over year to $7.8 billion from $7.2 billion in 2013, reflecting a 4% contribution both from organic growth and acquisitions. However, revenues fell short of the Zacks Consensus Estimate of $8.1 billion Financial Position Dover generated cash flow from operating activities of $952.8 million at the end of 2014, compared with $979.6 million at 2013-end. Free cash flow was $768.8 million for the full year as against $837.9 million in During 2014, Dover repurchased approximately 7.5 million of its shares for $601 million. The company completed its Nov 2012 $1 billion stock repurchase program in 2014 by repurchasing 3.6 million shares. The remaining 3.9 million of share repurchases in 2014 were made pursuant to the share repurchase program approved in May As of Dec 31, 2014, the approximate number of shares available for repurchase under the May 2012 share repurchase authorization were 38,041. Moreover, Dover has declared its intention to divest Sargent Aerospace (Sargent), a supplier of precision-engineered components and aftermarket services in the aerospace and defense industries, and part of Dover's Engineered Systems segment. On Dec 18, 2014 Dover signed a definitive agreement to sell its Datamax O'Neil unit to Honeywell International Inc. for $185 million. The divestiture, which mainly pertains to workforce reductions and efforts to consolidate its manufacturing footprint, are expected to lead to over $50 million in annualized benefits. Both Sargent and Datamax O'Neil (D-O) are reported as discontinued operations for the fourth quarter and 2014 results. Dover expects to complete the sale of D-O in the first quarter of 2015, while the sale of Sargent is expected to occur in the second quarter of Dover intends to use the after-tax proceeds from the divestitures for share repurchases and growth opportunities. Trimmed 2015 Guidance Dover now expects total revenue growth of 1% to -2%, which mainly reflects new Energy revenue estimate of -6% to -9%, a 15 point reduction from the prior forecast. The guidance primarily considers the impact of lower oil prices, discontinued operations, share repurchase activity and foreign exchange volatility Within total revenue forecast, organic growth is anticipated to be approximately 1% to -2%, completed acquisitions will provide approximately 2% growth and foreign exchange is expected to be a 2% headwind. In total, Dover now expects full-year adjusted earnings per share to be in the range of $4.70 to $4.95, a $0.35 decline from the previous guidance. Equity Research DOV Page 5

6 VALUATION At its current price, Dover s trailing 12-month earnings multiple is 15.6x, compared with the 28.2x average for the peer group and 18.3x for the S&P 500. Over the last five years, Dover s shares have traded in a range of 11.0x to 22.5x trailing 12-month earnings. The stock is trading at a 17.9% discount to the peer group based on forward earnings estimates. Our Neutral recommendation indicates that the stock will perform in line with the market. Our target price of $74 is based on 15.5x 2015 EPS of $4.76. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Dover Corporation (DOV) Industry Average S&P Ingersoll-Rand Plc (IR) Atlas Copco AB (ATLKY) Flowserve Corp. (FLS) Metso Corporation (MXCYY) 18.0 N/A TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Dover Corporation (DOV) Industry Average S&P N/A 2.0 N/A Equity Research DOV Page 6

7 Earnings Surprise and Estimate Revision History Equity Research DOV Page 7

8 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of DOV. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1128 companies covered: Outperform %, Neutral %, Underperform 8.5%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research DOV Page 8