Dover Gets Its Message Right
Dover Corp. still has a ways to go to earn back investors' trust, but a turnaround in its energy business no longer seems like a mirage.
The $12.3 billion company, which makes artificial lifts used in oil extraction as well as refrigerator equipment, held its investor day on Thursday and predicted earnings per share would be in the range of $3.40 to $3.60 this year based on organic growth of as much as 5 percent. That profit forecast was less rosy than what analysts were expecting, but perhaps that's a sign that Dover is finally learning how to conservatively prime expectations after eight downward earnings revisions since December 2014. It also, for once, didn't cut its 2016 guidance. 1 Way to go!
Even the low end of its EPS range would give Dover meaningful growth for the first time in about three years. That rebound in organic revenue is another thing shareholders haven't seen for a while and it will be fueled in large part by a recovery in Dover's energy-equipment business, which has seen half its sales wiped out over the past two years because of the downturn in oil prices. Dover expects organic growth in that business of as much as 16 percent in 2017.
That kind of aggressive forecast may raise a few eyebrows. CEO Robert Livingston has gotten the outlook for Dover's energy division wrong before. He initially estimated an organic growth decline of as much as 11 percent for the energy business in 2016; the drop will wind up more like 25 percent-plus based on analysts' latest estimates. Livingston said in July that the "second quarter will mark the low point of our 2016 performance in our energy segment," but that that didn't quite work out as planned either. Continued weakness in longer-cycle oil and gas markets was one reason the company had to drastically chop its 2016 outlook in October.
Livingston is far from the only executive to get calls on the oil and gas market wrong, but his misplaced optimism has sometimes worn thin with analysts. This latest call for a recovery, however, seems more on point.
Dover's forecast depends on an average U.S. rig count of 680 to 700 in 2017 and an average price per barrel of West Texas Intermediate crude of $55. Oil is currently trading for about $53 a barrel and Dover's rig count assumptions are well within the range of the average implied by Morgan Stanley's estimate of 868 by year end.
Like any wager in the oil market right now, there are a number of big caveats. The biggest is the risk that OPEC doesn't follow through with promised supply cuts. Then, there's the question of what an America-first energy policy under President-elect Donald Trump might mean for oil prices and global energy demand. Rolling out reasonable expectations is also easier than actually executing on those forecasts. For now, there's no reason to think Dover can't accomplish its goals in energy, but the onus is on management to prove it.
Once Dover finally gets its energy business in line, the question becomes, does it actually want to keep it? The company's out-sized energy exposure has caused its stock price to take a bigger hit than most industrial companies from the commodities downturn. Distancing oneself from such volatile businesses is in vogue these days, as seen by General Electric Co.'s merger of its energy business with Baker Hughes Inc. Steve Winoker of Bernstein questioned whether a deal in that fashion might be something Dover's management would consider, while Nicholas Heymann of William Blair & Co. speculated a high price might get the company to ditch the energy business altogether.
You know what they say, once something is fixed (enough), sell it before you have to fix it again.
Dover still expects earnings per share to be within its previous guidance range of $3 to $3.05, excluding special items. Taking into account the impact of its Tipper Tie disposition, the acquisition of Wayne Fueling Systems and a charge related to an anticipated product recall, earnings will amount to $3.17 to $3.22 a share.
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