Industrials

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Don't count your industrial equipment-manufacturer turnarounds before they've hatched.  

Dover, the $10.4 billion maker of artificial lifts, compression valves and refrigeration systems, on Monday cut its guidance for 2016 after its businesses performed "well below" expectations in the third quarter. It now expects earnings per share of $3 to $3.05 this year. At the midpoint, that's down 11 percent from its previous guidance. Organic sales will now decline at least 7 percent this year. 

Dover investors responded with the biggest selloff among the S&P 500's industrial companies. As of midday, the stock was on track for its deepest slide since 2011. Rightly so: Even at a time when many an industrial and energy-exposed company are lowering their forecasts, the magnitude of Dover's downward earnings adjustment is remarkable and suggests continuing issues to preserve its profitability. The company also delayed the closing of its $780 million acquisition of Wayne Fueling Systems amid regulatory pushback in the U.K. 

Monday's announcement was made all the more painful because investors had just started to think Dover was turning a corner. Bungled messaging may be partly to blame. CEO Robert Livingston said in July that the "second quarter will mark the low point of our 2016 performance in our energy segment," suggesting modestly improved results in the back half of 2016. But the bleeding hasn't stopped. While Dover has experienced an improvement in demand for its upstream drilling and production offerings, other parts of the company that do business in the oil and gas industry continue to struggle. Industrial companies that are combating slow global growth also aren't breaking out their wallets with gusto to buy equipment.

What Gives?
Dover shares have climbed despite repeated cuts in the company's guidance
Source: Bloomberg

At the same time, perhaps investors should have been expecting this -- or at least adopted a bit more skepticism about whatever Dover says. The equipment maker has now lowered its 2016 earnings guidance three times and its revenue expectations four times. All in, there have been eight downward earnings revisions since December 2014. And yet Dover's stock gains over the year leading up to Monday's announcement were more than double that of the S&P 500 Industrial Index.

Tandem Bicycle
As oil prices have risen, so has Dover's stock
Source: Bloomberg

Dover is among a group of industrial stocks that have been buffeted this year by investors' fear of missing out on a revival in global growth and commodity prices. Its stock price has to some extent traced the price of oil, which has been climbing lately on optimism that OPEC's pledge to reduce output -- and Russia's apparent willingness to play along -- will help temper the crude supply glut. But many details need to be worked out, and it's not clear how quickly an agreement would flow through to capital spending decisions -- such as whether to buy Dover-made equipment.

Overenthusiastic?
Dover was valued at a premium to the median earnings multiple for the S&P 500 Industrial Index as of last week
Source: Bloomberg

For now, it appears that the revival investors were hoping for is still a ways off. Wagering on the future is one thing, but it wasn't rational for Dover to be trading at a 27 percent premium to the median 2016 earnings multiple of its industrial peers. That made the ride down on Monday all the rougher. As the third-quarter earnings season begins, there's a lesson in that for holders of other industrial companies trading at over-the-top valuations.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net