Description

Company: Dover Corp (DOV)

Current Price: $72.47

Date: 6/25/18

Downside Price: $63.00

Upside Price: $98.00

Upside / Downside: 34% / 14%, or 2.5:1

Situation:  Undervalued Remain-Co / Management Change

 

Recommendation

 

Buy DOV at current prices; hedge with a short basket of peer multi industrial names towards the higher end of the sector’s valuation range.

 

Investment Overview

 

Dover is the quintessential value with a catalyst investment idea. This highly liquid blue chip multi-industrial company is in transition from a cyclical industrial to a multi-year compounder after spinning off its energy business (Apergy) in May 2018. The company has ~30% recurring revenue, is ranked 1 or 2 in market share in the majority of its businesses and is currently buying back 6.5%+ of its stock.

 

An investment in Dover at its current price offers limited downside as DOV trades among the lowest valuation of peers  (on my numbers: 13.5x 2018E PE, 11.5x 2019E PE, or on consensus numbers: 15.0x 2018E PE, 13.0x 2019E PE) with the highest free cash flow yield (6.6% 2018E, 7.3% 2019E), despite manageable current leverage under 2.5x.

 

Further, Dover is halfway through its three year margin enhancement project with a new tenured CEO who joined in May 2018, trained by noted operational turnaround expert Sergio Marchionne for over 20 years.

 

Specific near term catalysts:

 

·        Re-ratings of Dover post spin as the business has now become less cyclical.

 

·        EBITDA margin improvements driven by the current cost cutting / efficiency program.

 

·        A new and experienced CEO with a proven repeatable history of margin improvement that will shift Dover from being an acquirer to an operational leader.

 

·        Stock buyback of $700MM in Q2’18.

 

·        Expectation for a September 2018 announcement at the MS industrial conference by the new CEO.  Expect new CEO to announce a focus on 1) further margin improvement, 2) free cash flow generation, 3) pruning the portfolio and 4) using free cash flow to repurchase equity.

 

Investment Details

 

Company Overview

 

Dover Corp. is a diversified manufacturer with three operating segments:

·        Engineered Systems ($2.6bn in revenue)

o   Marking and coding products, vehicle lifts, vehicle diagnostics/repair solutions, clamps and waste processing. Engineered systems is exposed to consumer goods, vehicle service, and waste markets.

 

·        Fluids ($2.3bn in revenue)

o   Fuel dispensers, fluid containment solutions, pumps, compressors, and connectors. Fluids is exposed to retail/commercial fueling and petrochemical markets.

 

·        Refrigeration & Food Equipment “R&FE” ($1.6bn in revenue)

o   Refrigeration systems, display cases, electrical distribution products, and commercial food service equipment. F&RE is largely exposed to supermarket and food packaging/preparation markets.

 

New Management

 

Effective May 1, 2018, Richard J. Tobin, former CEO of CNH Industrial, N.V. and member of Dover’s Board of Directors, became Dover’s President and CEO. Richard J. Tobin replaced Robert Livingston, DOV’s CEO for the past nine years.

 

Press release / employment agreement

https://www.sec.gov/Archives/edgar/data/29905/000119312518088722/0001193125-18-088722-index.htm

 

Compensation

 

·        Annual Base Salary, a minimum of $1.2MM per year.

·        Annual Bonus.

o   Targeted at 125% of annual base salary, based on performance metrics established by the Board.

·        Long-Term Incentive.

o   Annual fair value grant of not less than $7MM.

o   In 2018, the equity incentive award is:

• 60% SSARs (based on Dover Stock Price 3-year performance period).  

• 20% PSA (driven by EBITDA growth and free cash flow).

• 20% RSU.

o   Granted Awarded between and 5/23/2018 and 6/1/2018.

·        Sign-on Equity Award.

o   $6MM PSAs, performance conditions, vesting February of 2021.

o   $13MM RSUs, five equal installments on December 15th of each year, starting December 15, 2018.

·        Make Whole Cash Payment.

o   $1.0MM cash lump-sum payment.

 

Background

 

·        Wikipedia link:  https://en.wikipedia.org/wiki/Richard_J._Tobin

 

·        Notable experience:

o   CNH Industrial NV                        CEO                   09/2013-04/2018

o   CNH Global NV                              President          01/2012-09/2016

o   Fiat Industrial Spa                         COO                   11/2012-09/2013

o   CNH Global NV                              CFO                    03/2010-12/2011

o   Tobin joined CNH in 2010 from SGS SA, the world’s largest product inspector.

o   Richard Tobin was mentioned by FCA Chairman, John Elkann, as someone who could replace Sergio Marchionne as FCA Chief Executive Officer after 2018.

 

·        Relationship with Marchionne

o   Tobin was one of Marchionne’s longest-serving aides. The two worked together since the 1990s.

•  “Rich and I have worked together for 20+ years across various companies and industries and I wish him all the best,” Sergio Marchionne, chairman of CNH Industrial.

 

·        Tobin’s Reputation

o   Sell side views on Tobin:

•  “Solid leader with a good track record of driving operational excellence and effectively leading change in a global context.” 3/20/18 Citi

 

o   DOV IR’s view on Tobin:

• “Bob’s role was to grow Dover; Rich’s role is to operationally improve Dover. There’s a shift in management’s view from being a serial acquirer to an operator. Expect to see a lot less M&A and a focus on boosting margins and using free cash flow to buy back stock.”

 

DOV Segment Details

 

Segment Review

 

1 Engineered Systems (ES, $2.6bn revenue)

 

ES Sub-segments:

·        1A Printing and identification ($1.1bn revenue)

o   Marketing & Coding (MI ~$950MM revenue)

• Description: Marking and coding equipment. Inks and consumables for textile printing.  Product identification / traceability solutions, thermal transfer, laser, and label systems.

• Comps: Danaher, Brother.

• Growth: Low to mid single digits.

• Drivers: Growing consumerism in developing economies. Food safety concerns. New packaging designs and materials.

• Crown Jewel: Markem-Imaje ($950MM revenue), prints expiration dates/labels on food products like yogurt (Danone is a customer). Only 3 players: Danaher and Brother (Domino brand). Razor blade model; DOV sells equipment then sells the ink for the equipment.

 

o   Digital Printing (MS/JK/Caldara, <$200MM)

• Description: Digital inkjet printing systems and associated consumables. Bench tools and equipment used in 3D printing and electronics industrial product assembly.

• Comps: EFI, Konica Minolta, Sensient.

• Growth: Double digits.

• Drivers: Growth in fast fashion, 3D printing, print quality, and increased FR filter use.

• Segment Brands: Microwaves Products Group (MPG), designs/ manufactures RF and Microwave Filters, kept from the Knowles spin). OK International, 3D Printers (Q300) and software.

 

·        1B Industrials ($1.5bn revenue)

o   Environmental Solutions (ESG, ~$450MM)

• Description: Refuse collection vehicles, waste compacting and recycling equipment.

• Comps: Oskosh, Labrie.

• Growth: Low to mid single digits.

• Drivers:  Productivity. Safety. Reduced availability of landfills. Growth in recycling.

• Crown Jewels: ESG ($450MM revenue):  Environmental Solutions Group. Makes the compaction unit for garbage trucks, largest maker in the country. Customers buy chassis separately and DOV puts the compaction unit on the truck. DOV also makes robotic arms to lift garbage cans (big in California), cameras for garbage trucks, IoT connectivity and truck tracking.

 

o   Vehicle Service Equipment (VSG, ~$650MM)

• Description: Automotive lifts and collision repair equipment. Specialty hydraulics, fastener, bearings, switches and filters. Premium pistons, crankshafts, gaskets and accessories. Winches, hoists, powertrain components and accessories.

• Comps: Snap-on, Fortiv, Car-o-liner.

• Growth: Low to mid single digits.

• Drivers: Increasing average age of vehicles. Growing global car park. New materials used in auto manufacturing.

• Crown Jewels: VSG ($6500MM revenue): Vehicle Service Group, vehicle lifting, collision repair. Largest maker of auto lifts, what you see in a garage that lifts cars up to be worked on.

o   Segment Brands:  DE-STA-CO, industrial clamps.

 

2 Fluids ($2.3bn in revenue)

 

Fluids Sub-segments:

 

·        2A Retail Fueling / Fluid Transfer ($1.4bn revenue)

• Description:  Fluid components and quick disconnect couplings. Fueling nozzles and dispensers, and fuel management systems.

• Comps: Fortiv, Franklin Electric.

• Growth: low-to-mid singles, plus EMV lift (EMV = Europay, MasterCard and Visa).

• Drivers: EMV upgrade cycle, payment systems to take chip based credit cards. Increasing miles driven. Auto growth in developing markets.

• Crown Jewel: Dover Fuel Co (<$1.4bn) Manufacturer of everything in a gas station except underground tanks, only end to end provider. Gas stations must have a new MV system by 2020 to read chip based credit cards, if not, card providers not liable for fraud, gas stations will be. Original compliance date 2018, now 2020, 10% gas stations in compliance.

 

·        2B Pumps ($675MM revenue)

• Description: Engineered pumps and systems for heavy duty industrial applications, filtration systems and pelletizing equipment for the plastics and polymers industries. Focuses on critical applications where safety, reliability and performance needed.
• Comps: IMEX (closest peer), SPX Flow, Nordson, Shimadzu.
• Growth:  low-to-mid singles.
• Drivers: Significant global petrochemical investment. Low feedstock prices. Worldwide growth of plastics usage. Global industrial growth.
• Segment Brands: CPC, couplings, fittings and shutoff valves. Hydro Systems, world’s largest manufacturer of injecting and dosing equipment, applications in cleaning, laundry, food service,  irrigation, horticulture, animal health, water treatment. FINDER, manufacture of pumps and systems.  PSG, pumps and systems for transfer of critical materials.

 

·        2C Hygienic & Pharma ($250MM revenue)

• Description: Specialty liquid dispensing systems.

• Comps:  IMEX, SPX Flow.

• Growth:  mid-to-high singles.

• Drivers: Health and safety concerns.

• Segment Brands: Maag, manufacturer of pelletizing and filtration systems and pulverizers for the synthetic, chemical, petrochemical, pharmaceutical, and food industry.

 

3 Refrigeration & Food Equipment “R&FE” ($1.6bn in revenue)

R&FE Sub-segments:

 

o   3A Retail Refrigeration  ($1.3bn revenue)

• Description:  Commercial glass freezer doors, lighting systems, and display equipment.

• Comps: Panasonic, Lennox.

• Growth: low-singles.

• Drivers: Regulations (DOE, EPA, FDA), Merchandising “Blurring” (lines between online and physical spaces). Retailer focus on fresh & healthy foods. Sustainability.

• Crown Jewel: Anthony HillPhoenix ($1.1-$1.2bn revenue) makes display cases, refrigeration systems, power systems and comprehensive services. Serves supermarkets & convenience stores. Driven by 75-80% remodeling (50%/50% pre-great financial crisis).

 

o   3B Food Equipment  ($300MM revenue)

• Description: Commercial food preparation equipment. Aluminum can production equipment. Brazed plate heat exchangers (heat transfer device used in outdoor wood furnaces, radiant heating, floor heating).

• Comps: The Middleby Corporation, Welbilt. Alfa Laval. Danfoss.

• Growth: mid-singles.

• Drivers: “Food Factory” productivity needs. Regulations, global energy efficiency, adoption of brazed plate technology, urbanization driving compact solutions.

• Crown Jewels: Unified Brands ($200MM revenue) Commercial kitchen equipment manufacturer of foodservice and restaurant equipment. Belvac ($100MM revenue), makes machines to make cans, high margins, market leader but finite market. Ball Rexam is the main client.

• Segment Brands: SWEP (Swedish based, brazed plate heat exchanger producer).

 

Model Summary - Historic Review / Projections:

 

1 Engineered Systems

Quarterly results in the appendix

 

·        Historic Commentary

• Printing’s key asset is Markem-Imaje ($950MM revenue, packaged food label printing) and industrial’s key asset is ESG ($450MM, waste equipment) and VSG ($650MM, auto repair car lifts).  Total segment organic growth has consistently been aided by Markem-Imaje’s ink business as the company’s equipment has 25% market share (behind leader Danaher), and ink sold provides solid recurring revenue.  Industrial demand is less stable, though reported revenue has varied over the past three years due to disposals. Industrial activity in 2016 exhibited softness from the general industrials market. EBITDAM have benefited from operating leverage/productivity enhancements (staff reductions, product line moves). The dip in 2017 margins and decline in EBITM incrementals was due to increases in raw material costs (steel).

 

·        Projections - Mgt Guidance:

o   Revenue:

• Organic revenue growth for 3 years of 3%-5% (6/6/17 Mid-Year Investor Meeting).

o   Margins:

• 3 year (2016-2019) projected segment margin improvement: 150-200bp (6/6/17 Mid-Year Investor Meeting).

• Marking and coding, digital printing and waste handling drove growth in 2017 and remain strong in 2018. (1/30/18 Q4’17 Dover Earnings Call).

• Expects margins to improve 200bp in the midterm, driven by productivity improvements. (9/14/17 Dover Corp at Morgan Stanley Laguna Conference).

• Management has very strong Q2 and Q3 visibility. (4/27/18 Q1’18 Dover Earnings Call).

o   Other

• Post spin, Tulsa Winch (industrial parts for heavy machinery), originally in Energy will be in ES.

·        Projections - Industry Color / Channel Checks:

o   Revenue:

• “Markem-Imaje is a well established market leader in the food industry.” Dover Customer.

o   Margins:

• “Dover may need to increase prices to cover raw material inflation.” Dover competitor.  

·        Projection Key Assumptions:

o   Revenue:

• Organic revenue is expected to grow 6.5% in 2018 and 3% in 2019/2020. The segment will benefit from reclassification revenue of Tulsa Winch joining the segment. Organic revenue in Q2-Q4’18 of 6% is in line with an average 6% organic revenue growth the past 5 quarters. Expectations are revenue will revert to the lower end of management’s target in 2019 and 2020.

o   Margins:

• EBITM is expected to increase by 100bp. Half of the 200bp plan from 2016-2019, with an incremental 30bp in 2020.  Targets are lower due to concerns over raw material costs.

2 Fluids

Quarterly results in the appendix

 

·        Historic Commentary

o   Dover Fuel Co is the Fluid Transfer sub-segment; an end to end manufacturer of gas station equipment (everything but the tank). DOV and Fortive are a duopoly outside Japan. DOV benefited in 2017 from EMV rollout. Credit card companies are forcing gas stations to put in place chip card readers (initially there was a 2018 deadline, but now 2020). Only 10% of gas stations are compliant.  Segment EBITDA margins have been impacted by large low EBITDAM Fuel Co acquisitions in 2016/2017, with synergies to be realized by 2019 and which alone will add 160-170bp to the segment. Fluid Transfer was impacted in 2017 by moving production from Sweden to lower cost Dundee, Scotland factory (completed May 2018). Assets within pumps and hygienic & pharma have been reshuffled several times and were impacted in 2016 by a longer cycle in upstream oil and gas markets due to reduced capex spending. This is DOV’s remaining cyclical asset, though pumps have an average replacement cycle of 3-4 years.      

 

·        Mgt Guidance:

o   Revenue:

• Organic revenue growth for 3 years (2016-2019) of 3%-5%. (6/6/17 Mid-Year Investor Meeting).

o   Margins:

• 3 year projected segment margin improvement: 300-400bp. (6/6/17 Mid-Year Investor Meeting)

• Q1’18 margin impact due to factory consolidation (production relocation from Sweden to Scotland), expects significant improvement in Q2. (4/27/18 Q1’18 Dover Earnings Call).

• EMV orders were stronger in Q1, into Q2, than expected. (4/27/18 Q1’18 Dover Earnings Call).

• Expects large margin improvement in 2018 as several large acquisition will be fully integrated. (2/21/18 Dover at Barclays Industrial Select Conference).

o   Other

• Bearings and compression, which was part of Energy segment, will be reported within Fluids ($75MM estimated quarterly revenue impact).

·        Industry Color:

o   Revenue:

• “Dover and Fortive are basically the market globally in this niche.” Dover competitor.

• “No one really knows about the electronic vehicle impact, but industry growth is coming from the emerging market, hard to see EM switching to electronic vehicles in the next 10 years.” Dover competitor.

o   Margins:

• “Several companies were hit by a temporary weakness in EMV demand, regulations pushed back from 2018 to 2020; credit card companies want to get this done.” Dover competitor.

·        Projection Assumptions:

o   Revenue:

• Organic growth in 2018 of 2.8% (3% in Q2’18, and 4% for H2’18) is assumed, ramping to 5% in 2019 due to EMV and then falling back to the midpoint of management’s guidance at 4%.

o   Margins:

• Margin improvement was assumed to be 260bp from 2016 to 2019, with a further expansion of 50bp in 2020. EBIT incremental margins step up in 2018 through 2020, benefiting from the factory consolidation as well as fuel acquisitions being fully integrated by 2019 (alone a 160-170bp improvement).

 

3 Refrigeration & Food Equipment (R&FE)

Quarterly results in the appendix

 

Historic results / projections:

 

·        Historic Commentary

o   Refrigeration is predominately Anthony / HillPhoenix ($1.1-$1.2bn revenue) a commercial refrigerator manufacturer. Food equipment comprises Unified Brands (<$200MM revenue), commercial cooking equipment and Belvac ($130MM revenue), maker of equipment to make aluminum cans.  Refrigeration has been impacted by a weak end market (supermarkets), partly offset by increased orders ahead of a new energy regulation in 2017. Food equipment’s reported revenue decline was due to asset sales, ex-asset sales reported sub-segment revenue increased 6.2% in 2017 driven by strong aluminum can equipment shipments. EBITDAM has been impacted by weakness at the refrigeration sub-segment.

 

·        Mgt Guidance:

o   Revenue:

• Expects retail refrigeration organic growth for 2018 to be 5-7%, above original segment estimates in the 3 year plan, despite a tough first half 2018 (1/30/18 Q4’17 Dover Earnings Call).

• Organic revenue growth for 3 years of 3%-4% (6/6/17 Mid-Year Investor Meeting).

o   Margins:

• 3 year (2016-2019) projected segment margin improvement: 300-400bp (6/6/17 Mid-Year Investor Meeting and (9/14/17 Dover Corp at Morgan Stanley Laguna Conference).

• Refrigeration in the second quarter will be impacted by tough comps (4/27/18 Q1’18 Dover Earnings Call). All of H1’18 was expected to be challenging  as last year benefited from strong shipments in advance of regulatory changes. (1/30/18 Q4’17 Dover Earnings Call).

• Margins are highly sensitive to volume, volume growth in H2’18 will pop margins. (4/27/18 Q1’18 Dover Earnings Call).

• Expectations are for a strong H2’18, Q3’18 is expected to be the strongest quarter of the year with margins expected to improve by 100bp for the year. (4/27/18 Q1’18 Dover Earnings Call)

• New business is driven by remodel activity, not new store construction. (4/27/18 Q1’18 Dover Earnings Call).

• Regarding food equipment, DOV won a big piece of business (against Welbilt/Middleby) and expects a strong H2’18. (4/27/18 Q1’18 Dover Earnings Call).

·        Industry Color:

o   Revenue:

• “Refrigeration is impacted by both a weak end market and a comparable that benefited from a regulatory boost. We’re expecting a better back half, customers who under spent need to catch up and appearances matter with big box retailers.”  Dover IR.

• “We’re only spending on what we have to; if the refrigeration unit looks fine and works, why replace it?” Local supermarket manager.

• “In Food Equipment, I know of Dover from their kettles and under cabinet refrigeration, a lot of quick serve customers guys use them.  They’re like a mini- Middleby.” Food service executive.

o   Margins:

• Belvac is a great product, but how much machinery do we need that forms aluminum cans?” Dover customer.

·        Projection Assumptions:

o   Revenue:

• Even though management raised its expectation for FR&E’s organic growth from 3-4% (2016-2019) to 5-7%, projections assume Q2’18 organic revenue growth of 1% and 3% for the remainder of the year (an uptick given management’s report of winning large food equipment business). Revenue is expected to then grow at 2% for 2019/2020.

o   Margins:

• EBIT incremental margins are expected to be 20% for 2018 and 15% for the remainder of the projection period, resulting in an 80bp improvement from 2016 to 2019, well below the 300-400bp expected by management, with a minor 10bp gain in 2020.

 

Total

Quarterly results in the appendix

 

·        Mgt Guidance:

 

·        Revenue:

o   2018 total revenue to increase 4% to 5%, organic revenue growth 3% to 4%, acquisitions will add 1% and FX 3%. Dispositions will have a 3% impact. (4/27/18 Q1’18 Dover Earnings Call).

 

·        Margins:

o   3 year segment margin improvement: 300bp ex-Apergy (2/21/18 Dover at Barclays Industrial Select Conference).

o   Expects 2018 adjusted segment margin to improve about 50 basis points over 2017 to 15.1% at the midpoint (pre-corp. exp). (4/27/18 Q1’18 Dover Earnings Call).

o   ES / Fluids, expects 300 to 400 basis points according to plan. Needs volume in refrigeration for H2’18 to drive margins.  (4/27/18 Q1’18 Dover Earnings Call).

o   Potentially will outperform margin targets for 2018. (2/21/18 Dover at Barclays Industrial Select Conference).

·        Other

o   Full year 2018 adjusted EPS of $4.70 to $4.85. (4/27/18 Q1’18 Dover Earnings Call).

o   2017: first half was 44% of earnings; 2018 is identical. (4/27/18 Q1’18 Dover Earnings Call).

o   2018 will be light with in M&A and have higher buybacks. (2/21/18 Dover at Barclays Industrial Select Conference).

o   Regardless of DOV’s strong activity, no guidance change until new management joins. (4/27/18 Q1’18 Dover Earnings Call).

o   DOV has a $0.05 change in guide regarding share repurchases, assuming the dividend received from the Apergy spin is fully allocated to share repurchases in 2018. However, the $0.05 increase is as conservative as possible and does not assume an early ASR. Forecast assumes 140 -- 154.6 weighted average shares for 2018. Timing of the $0.05 could be done lots of different ways, in 2019 sees shares starting '19 in the 145/ 146MM share range. (4/27/18 Q1’18 Dover Earnings Call)

o   Corporate costs, previous guide for $122MM, raised to $129MM due to $5MM of Apergy stranded cost. Expects most of this to go away into '19. (4/27/18 Q1’18 Dover Earnings Call).

 

Model versus Consensus versus Guidance  

 

 

The model results in an EPS of $5.32 for 2018 and $6.30 for 2019. This is above management’s 2018 guidance of $4.70 to $4.85 and consensus of $4.80 for 2018 and $5.58 for 2019. There are a few very important caveats as to this difference.

 

Share buyback timing

 

First, Dover has a set 20MM share repurchase program from a February 2018 authorization that at 3/31/18 was not utilized.  Second, Dover targeted a $1bn spending plan for buying back stock, with proceeds from the Apergy spinoff ($700MM) as the primary funding source.

 

Management’s 2018 EPS guidance assumed an impact of $0.05/share, the lowest DOV could possibly assume; this was announced before the accelerated stock repurchase plan published on 5/22/18. Under the ASR, Dover would the agent (Goldman) $700MM on 5/24/18 and on that date receive initial deliveries of 7,078,751 million shares, a substantial majority of shares expected to be retired in the ASR, with the entire program expected to be completed in 2018.

 

The model’s assumption is a buyback of $700MM of stock in Q2’18, with additional purchases in H2’18. DOV is projected to complete the $1bn program in Q3’18 and additional large purchases in Q4’18 as DOV is now focused on buybacks and less on M&A. Consistent with management guidance, DOV will start 2015 in the 145MM share range. Several consensus models reviewed assume the $700MM is conducted evenly in 2018.

 

Margins

 

While the model places a discount on all three segment margins and growth compared to management’s expectation, consensus’ broad reduction is even more draconian. The consensus reduction is also broad based; the model constructed here places a greater discount on the low margin F&RE segment (compared to consensus / management) and has higher expectations for the other two higher margin segments than consensus.

 

Accounting Blur

 

DOV only recently started reporting “adjusted EPS” as prior results blurred the company’s earnings due to one items earnings including amortization of goodwill driven by M&A, staff cuts, factory consolidation and more. Consensus forward estimates in some cases still incorrectly use the unadjusted results.

 

Valuation

 

Several approaches were taken to value DOV, a valuation based on the company’s historic multiples, comparables, and assets and SOTP.

 

Comparables

 

Despite DOV’s mix of stable businesses with lower cyclicality, and EBITDA margin improvement post-spin (i.e. 15.9% in 2017 pre-spin vs 18.2% in 2018 post spin), valuation is attractive as DOV trades at lower end of peer range, at 13.8x 2018 EPS and 11.7x 2019 EPS.

Source: Bloomberg Consensus as of 6/18/18, 2018-2020 organic growth via GS 5/10/18

 

A combination of stock buybacks and margin improvements offers DOV the potential to re-rate closer to the middle of the peer pack as quantified below.  DOV’s target price of $98 is 15.5x 2019 est EPS.

 

 

Historic Multiple Basis

 

From 2012 – 2017, DOV traded at an average PE of 20x, or a stock price of $106/share using the model’s 2018 results. Or a range of $94 to $97 based on management’s 2018 guidance.

 

SOTP

 

Valuing DOV on a sum of the parts basis, with adjustments to each segment given DOV’s product offering and margin profile, results in a target price of $95.25.

 

 

Asset Basis

 

DOV has been very active on the M&A side, both in acquiring and disposing of assets. Many of DOV’s key assets go back decades (i.e. Unifed Brands, part of DOV’s F&RE segment was acquired in 1967), while some were recent additions (Kunststoffmaschinen GmbH, January 2018, filtration systems , now part of Dover’s Maag business).

 

The below values DOV today based on its historic acquisitions adjusted for inflation. About half of the asset values are driven by reported deal transaction value as of the transaction date, adjusted for inflation, while the others are assumed, which takes into account similar deals at the same time frame.

Activists

 

·        10/2017 Activist Third Point Dan disclosed a stake in Dover Corp and reported talks with management regarding increasing shareholder value, including disposing its energy business.

 

·        Third Point has three plans for Dover,

o   Separate the Energy Segment (completed)

o   Address Underearning in Core Industrial Portfolio (pending)

o   Optimize Capital Allocation (occurring / pending)

 

·        “Removing the energy cyclicality from Dover will greatly reduce earnings volatility, allowing investors to focus on a high quality industrial portfolio with strong growth drivers….We plan to closely monitor the company’s progress toward its 2019 margin targets and will stay engaged to promote a thoughtful capital allocation process…. We still see significant upside with shares trading at 14x 2019 estimated free cash flow versus the broader multi-industrial peer group that trades at 18x 2019 consensus free cash flow.”  Dan Loeb, Third Point

 

·        Holders of DOV received one share of APY per 2 shares of DOV held, reducing Third Point’s cost basis to $56.72/sh.

 

Risks

·        Weak start to refrigeration in 1Q as well as structural/competitive pressure will be a drag longer-term.

·        ES Industrial experienced strong growth in Q1’18 due to a strong truck market. The business is cyclical and a downturn in the sector will impact it.

 

Appendix

 

Quarterly Results and Review by Segment

 

1 Engineered Systems (ES, $2.6bn revenue)

 

o   ES’s organic revenue growth in 2017 and Q1’18 was driven by marking and coding, digital printing and waste handling. Performance is expected to continue in 2018.

o   ES’s weak Q1’17 results reflected challenges with chassis supply (impacting ESG), rather than weakness in the underlying segment.

o   The company has won new higher margin remote monitoring / IoT business in this segment.

 

2 Fluids ($2.3bn in revenue)

 

o   Fluids was weak in Q1’18 due to temporary inefficiencies driven by DOV’s factory consolidation plan in Europe as well as the falloff in EMV. EMV was initially expected to be a 2018 requirement, resulting in higher orders in 2017 that fell away when the requirement was delayed to 2020. As with ES, the company has won remote monitoring / IoT retail refueling business with a goal of improving customer productivity / reducing costs.

o    Margins were also pressured by several new large acquisitions in 2017 that won’t be fully integrated until 2019.

 

3 Refrigeration & Food Equipment “R&FE” ($1.6bn in revenue)

 

o   F&RE is suffering from a weak end market and weak comps. Q1’17 performance was boosted by a 3/31/17 requirement that refrigeration equipment ordered after 3/31/17 meet certain energy requirements.  DOV also reduced head count in March / early April 2018.

 

Total

 

Key SEC Links:

 

DOVER

 

5/22/18

Buyback

On May 22, 2018, Dover Corporation (“Dover”) entered into a Master Confirmation and Supplemental Confirmation (the “ASR Agreement”) with Goldman Sachs & Co. LLC (“Goldman”) pursuant to which it will repurchase $700 million of its common stock, par value $1.00 per share (the “ASR Program”). Dover is conducting the accelerated share repurchase under a repurchase authorization for an aggregate of 20,000,000 shares approved by its board of directors in February 2018. Dover will fund the accelerated share repurchase with funds received from Apergy Corporation (“Apergy”) in connection with the consummation of the Apergy spin-off transaction.

https://www.sec.gov/Archives/edgar/data/29905/000119312518170924/0001193125-18-170924-index.htm

 

5/14/18

Separation and Distribution Agreement with Apergy

https://www.sec.gov/Archives/edgar/data/29905/000119312518161162/0001193125-18-161162-index.htm

 

Pro-Forma Financials

https://www.sec.gov/Archives/edgar/data/29905/000119312518161162/d585845dex992.htm

 

5/9/18

DOVER ANNOUNCES DISTRIBUTION OF SHARES OF APERGY TO SHAREHOLDERS

Dover will receive a one-time cash payment of $700 million from Apergy in connection with the completion of the spin-off.

http://phx.corporate-ir.net/phoenix.zhtml?c=85517&p=irol-newsArticle&ID=2348063

 

5/4/18

Results of Annual Meeting of Shareholders on May 4, 2018

https://www.sec.gov/Archives/edgar/data/29905/000119312518156289/0001193125-18-156289-index.htm

 

4/27/18

3/31/18 10Q, earnings release, presentation

https://www.sec.gov/Archives/edgar/data/29905/000002990518000026/0000029905-18-000026-index.htm

https://www.sec.gov/Archives/edgar/data/29905/000002990518000024/0000029905-18-000024-index.htm

 

4/16/18

Preliminary Unaudited Results of Apergy Corporation for the Quarter Ended March 31, 2018

https://www.sec.gov/Archives/edgar/data/29905/000119312518117714/0001193125-18-117714-index.htm

 

4/6/18

Temporary Suspension of Trading Under Registrant’s Employee Benefit Plans.

https://www.sec.gov/Archives/edgar/data/29905/000119312518109996/0001193125-18-109996-index.htm

 

4/3/18

DOVER ANNOUNCES APERGY INVESTOR DAY AND FILING OF FORM 10 REGISTRATION STATEMENT FOR PLANNED SPIN-OFF

http://phx.corporate-ir.net/phoenix.zhtml?c=85517&p=irol-newsArticle&ID=2339615

 

Investor deck for Apogee

https://www.sec.gov/Archives/edgar/data/29905/000119312518105461/d560100dex991.htm

 

3/21/18

CNH Industrial CEO Richard Tobin to step down

https://www.equipmentworld.com/cnh-industrial-ceo-richard-tobin-to-step-down/

 

3/20/18

Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.

https://www.sec.gov/Archives/edgar/data/29905/000119312518088722/0001193125-18-088722-index.htm

 

Robert A. Livingston to retire after successful 35-year career

 

Dover also announced that Richard J. Tobin, who most recently served as the Chief Executive Officer of CNH Industrial, N.V. (“CNH”) and who serves as a member of Dover’s Board of Directors, will become Dover’s President and Chief Executive Officer, effective May 1, 2018. Mr. Tobin has more than 30 years of experience in international management and finance, acquired through global leadership roles.

 

Dover Jumps After Naming Longtime Marchionne Lieutenant as CEO

https://www.bloomberg.com/news/articles/2018-03-20/dover-is-said-ready-to-name-cnh-veteran-richard-tobin-as-ceo

 

3/19/18

CNH Industrial CEO exit knocks shares, analysts still bet on spin-offs

- Shares in CNH Industrial (CNHI.MI) fell more than 2 percent on Tuesday after the truck and tractor maker said Chief Executive Richard Tobin would step down to pursue another executive opportunity.

https://uk.reuters.com/article/uk-cnh-industrial-ceo/cnh-industrial-ceo-exit-knocks-shares-analysts-still-bet-on-spin-offs-idUKKBN1GV2VP

 

2/16/18

FORM 10-K/A(Amendment No. 1)

https://www.sec.gov/Archives/edgar/data/29905/000002990518000019/0000029905-18-000019-index.htm

 

2/9/18

FORM 10-K

https://www.sec.gov/Archives/edgar/data/29905/000002990518000013/0000029905-18-000013-index.htm

 

1/30/18

DOVER REPORTS FOURTH QUARTER AND FULL YEAR 2017 RESULTS AND PROVIDES 2018 GUIDANCE

https://www.sec.gov/Archives/edgar/data/29905/000002990518000005/a201801258-k.htm

 

1/9/18

DOVER ACQUIRES ETTLINGER

http://phx.corporate-ir.net/phoenix.zhtml?c=85517&p=irol-newsArticle&ID=2325777

 

12/7/17

DOVER ANNOUNCES PLAN TO SPIN OFF WELLSITE BUSINESS INTO INDUSTRY-LEADING PUBLIC COMPANY

https://www.sec.gov/Archives/edgar/data/29905/000119312517363868/0001193125-17-363868-index.htm

 

10/20/17

Third Point Q3’17 Investor Letter

http://www.thirdpoint.com/wp-content/uploads/2017/10/Third-Point-Q3-2017-Investor-Letter.pdf

 

Dover shares have materially underperformed the industrial peer group over the three year period preceding our investment. A significant earnings decline in Dover’s energy business and the substantial fall in global crude oil prices were the primary drivers behind the underperformance. By this summer, energy commodity prices had stabilized and short cycle industrial end markets began to accelerate. We have been engaged in a constructive dialogue with management regarding several compelling value creation opportunities which are outlined below:

 

1. Separate the Energy Segment – Through several acquisitions, Dover has built a leading artificial lift franchise. We believe the strong cash flow generation, recurring parts and service revenue, and margin profile of the Dover energy segment will make it an attractive strategic target to many buyers. At the same time, removing the energy cyclicality from Dover will greatly reduce earnings volatility, allowing investors to focus on a high quality industrial portfolio with strong growth drivers and supporting a re-rating of Dover shares.

 

2. Address Underearning in Core Industrial Portfolio – Over half of Dover’s industrial EBIT is generated in consolidated markets where it has a #1 or #2 market share - primarily printing and identification and retail fueling. Despite these attractive end market dynamics, Dover industrial segment margins are well below peers in these businesses. Earlier this summer, Dover took the first step to address this material underearning and issued a plan that calls for 300bps of margin improvement by 2019. While the market has largely ignored these targets given the company’s mixed execution track record, management has confidently reassured us of their commitment to these targets and is taking full accountability for their ability to meet them.

 

3. Optimize Capital Allocation – In today’s market, Dover’s industrial peers with strong capital deployment frameworks receive credit for forward cash generation. Dover has a similar opportunity – we believe the company needs to communicate a strategic vision, continue to optimize its portfolio around that vision, and set stringent M&A criteria. With a disciplined approach to capital allocation, we believe the market will begin to discount the >$4 billion of cash generation at Dover industrial over the next five years.

 

Since the summer, Dover has announced it is exploring strategic alternatives for its energy business. The company has also announced a plan to switch to “adjusted EPS” reporting to better highlight its strong free cash flow generation. We plan to closely monitor the company’s progress toward its 2019 margin targets and will stay engaged to promote a thoughtful capital allocation process. While Dover shares have started to appreciate since these announcements, we still see significant upside with shares trading at 14x 2019 estimated free cash flow versus the broader multi-industrial peer group that trades at 18x 2019 consensus free cash flow.

 

10/19/17

9/30/17 10Q

https://www.sec.gov/Archives/edgar/data/29905/000002990517000054/0000029905-17-000054-index.htm

 

Earnings release, deck

https://www.sec.gov/Archives/edgar/data/29905/000002990517000053/0000029905-17-000053-index.htm

 

9/14/17

MS 5th Ann Laguna Conference Deck

https://www.sec.gov/Archives/edgar/data/29905/000002990517000048/0000029905-17-000048-index.htm

 

9/12/17

DOVER EXPLORING STRATEGIC ALTERNATIVES FOR THE SEPARATION OF ITS UPSTREAM ENERGY BUSINESSES

https://www.sec.gov/Archives/edgar/data/29905/000002990517000046/0000029905-17-000046-index.htm

 

8/7/17

8K Amend

vote of the shareholders at the Company’s Annual Meeting of Shareholders

https://www.sec.gov/Archives/edgar/data/29905/000002990517000041/0000029905-17-000041-index.htm

 

7/20/17

6/30/17 10Q

https://www.sec.gov/Archives/edgar/data/29905/000002990517000038/0000029905-17-000038-index.htm

 

Earnings release, deck

https://www.sec.gov/Archives/edgar/data/29905/000002990517000037/0000029905-17-000037-index.htm

 

6/27/17

FORM 11-K (Dover Corporation Retirement Savings Plan Index to Financial Statements)

https://www.sec.gov/Archives/edgar/data/29905/000002990517000034/0000029905-17-000034-index.htm

 

6/6/17

Mid-Year Investor Meeting

https://www.sec.gov/Archives/edgar/data/29905/000002990517000030/0000029905-17-000030-index.htm

 

5/30/17

Dover Corporation Conflict Minerals Report

https://www.sec.gov/Archives/edgar/data/29905/000002990517000027/0000029905-17-000027-index.htm

 

EPG Conference Deck

https://www.sec.gov/Archives/edgar/data/29905/000002990517000025/0000029905-17-000025-index.htm

 

5/9/17

Resutls for the Annual Meeting of Shareholders on May 5, 2017

https://www.sec.gov/Archives/edgar/data/29905/000002990517000022/0000029905-17-000022-index.htm

 

5/5/17

DOVER NAMES CARRIE ANDERSON AS VICE PRESIDENT, CONTROLLER

https://www.sec.gov/Archives/edgar/data/29905/000002990517000019/0000029905-17-000019-index.htm

 

4/20/17

3/31/17 10Q

https://www.sec.gov/Archives/edgar/data/29905/000002990517000017/0000029905-17-000017-index.htm

 

Earnings release, deck

https://www.sec.gov/Archives/edgar/data/29905/000002990517000016/0000029905-17-000016-index.htm

 

3/23/17

SCHEDULE 14A – PROXY STATEMENT

https://www.sec.gov/Archives/edgar/data/29905/000119312517093718/0001193125-17-093718-index.htm

 

Apergy

 

6/5/18

APERGY CORPORATION SUPPLEMENTAL FINANCIAL INFORMATON FOR THE THREE MONTHS ENDED MARCH 31, 2018

https://www.sec.gov/Archives/edgar/data/1723089/000172308918000011/0001723089-18-000011-index.htm

 

6/4/18

3/31/18 10Q

https://www.sec.gov/Archives/edgar/data/1723089/000172308918000008/0001723089-18-000008-index.htm

 

5/14/18

FORM S-8

Registration of 6,500,000 shares of common stock

https://www.sec.gov/Archives/edgar/data/1723089/000119312518162823/0001193125-18-162823-index.htm

 

5/11/18

Separation and Distribution Agreement

https://www.sec.gov/Archives/edgar/data/1723089/000119312518159527/0001193125-18-159527-index.htm

 

5/7/18

Issued $300MM in debt

https://www.sec.gov/Archives/edgar/data/1723089/000119312518154636/0001193125-18-154636-index.htm

 

4/25/18

Debt docs

https://www.sec.gov/Archives/edgar/data/1723089/000119312518130047/0001193125-18-130047-index.htm

 

4/17/18

Apergy listing approved

https://www.sec.gov/Archives/edgar/data/1723089/000087666118000379/0000876661-18-000379-index.htm

 

Acceleration Request for Apergy Corporation Registration Statement on Form 10

https://www.sec.gov/Archives/edgar/data/1723089/000119312518118697/0001193125-18-118697-index.htm

 

4/12/18

Form 10 (A) and related

https://www.sec.gov/Archives/edgar/data/1723089/000119312518114458/0001193125-18-114458-index.htm

 

3/26/18

Form 10

https://www.sec.gov/Archives/edgar/data/1723089/000119312518094914/0001193125-18-094914-index.htm

 

3/22/18

SCHEDULE 14A

https://www.sec.gov/Archives/edgar/data/29905/000119312518092116/0001193125-18-092116-index.htm

 

3/5/18

Amendment No. 2 to Draft Registration Statement on Form 10 Submitted February 7, 2018

https://www.sec.gov/Archives/edgar/data/1723089/000095012318002842/0000950123-18-002842-index.htm

 

3/5/18

Form 10 A

https://www.sec.gov/Archives/edgar/data/1723089/000095012318002841/0000950123-18-002841-index.htm

 

Other

 

Brother / Domino Deal

https://www.domino-printing.com/en-us/news-and-events/2015/brother-completes-acquisition-of-domino-printing-sciences

http://www.ey.com/Publication/vwLUAssets/EY-global-technology-ma-update-1q15/$File/EY-global-technology-ma-update-1q15.pdf

http://cogentvaluation.com/wp-content/uploads/2016/08/Industrial-Printers-Industry-Report-2Q-2016.pdf

 

Dover / Anthony Deal

http://phx.corporate-ir.net/phoenix.zhtml?c=85517&p=irol-newsArticle&ID=1763349

 

Snap-On / Car-O-Liner Deal

https://shoptoolreviews.com/news/snapon-acquires-car-o-liner/25850/

 

Proworks/OK / Dover

http://electronicsproductionworld.com/interview-with-bryan-gass-ok-international/

 

 

 

Catalyst

Re-ratings post spin

Management change

Stock buyback