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Most investors know that multinational industrial companies are suffering. Indeed, there is a perfect storm of sorts hitting the industrials from all sides. Industrial companies operate cyclical businesses: prospects rise and fall alongside the swings of the global economy. Moreover, a significant portion of their business comes from servicing the oil and gas markets. That is a big headwind due to the steep collapse in commodity prices.
Add to this the strengthening U.S. dollar, which is suppressing growth generated overseas, and it’s clear that the cards are stacked against industrials right now.
But Dover Corp. (NYSE: DOV), a diversified equipment manufacturer, still has a lot to offer investors. With its stock price in decline, the stock is now cheap. The Dover dividend is a solid 3%, which is well above the stock market average dividend yield. And the Dover dividend has been raised for an amazing 53 consecutive years.
A Cyclical Downturn
There is no sugarcoating the fact that Dover is stuck in a downturn. As a result, Dover’s fundamentals look ugly. Dover reported fourth-quarter and full-year earnings this week; revenue and diluted earnings per share from continuing operations fell 14% and 16%, respectively, in the fourth quarter.
For the full year, revenue and EPS declined 10% and 19%, respectively, it said in the report.
Not surprisingly, one of the key culprits was the rising U.S. dollar, since foreign exchange itself shaved off 4% from Dover’s revenue last year. And, lower capital spending by oil and gas firms was an additional headwind, as 21% of Dover’s total annual revenue came from its energy business last year.
After a number of downgrades by analysts, the earnings released Tuesday exceeded estimates, which moved the stock slightly higher.
Dover certainly is having a tough time right now, but it isn’t alone. The downturn in the energy markets has afflicted industrial companies across the sector. For example, one of Dover’s industrial peers, Emerson Electric (NYSE: EMR), fared just as poorly last year. Emerson’s total sales and earnings per share declined 9% and 15%, respectively, in 2015.
Dover doesn’t see an immediate turnaround, but this should come as no surprise. Organic revenue, which strips out the effects of acquisitions and foreign exchange, is expected to decline as much as 4% this year.
Fortunately, it’s not all bad news. Dover has embraced a laser-like focus on cost cuts, and is committed to extracting significant cost cuts to grow earnings and free cash flow in 2016.
Dover’s Strategy
The company’s growth plan, called Dover Excellence initiative, is designed to significantly cut costs and slim down the business to an appropriate size given the downturn in its core markets. The program places a renewed emphasis on efficiency. Efficiency efforts allowed Dover to actually increase free cash flow last year to $795 million, thanks to significant reductions in capital expenditures.
Dover’s growth plan also includes acquisitions. Last year, Dover made four acquisitions totaling $567 million. As a result, management expects acquisitions to provide 7% revenue growth this year. And, thanks to synergies, Dover can extract enough cost savings to boost earnings.
Dover expects these efforts to grow its earnings this year, even though organic revenue is projected to decline. At the midpoint of its 2016 forecast, Dover expects EPS of $3.95 per share. That would represent 5% earnings growth this year, which would be a great achievement considering the very difficult operating environment that Dover finds itself in.
The Bottom Line
Dover is facing significant challenges, as are all industrial companies. The rally in the U.S. dollar, combined with the economic slowdown in the emerging markets and collapsing commodity prices, all combined to weigh on Dover’s revenue and earnings last year.
But these markets are cyclical, and Dover has been through this before. It’s survived plenty of economic downturns and recessions over the past several decades, and kept raising the Dover dividend each year without interruption.
Dover stock trades for 13 times 2016 projected earnings and the stock yields 3%. While the short-term may continue to have some bumps in the road, long-term investors should put this under-appreciated company on the radar.
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