Industrials

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

Dover Corp.'s results are a good omen for industrials as we move into the thick of earnings season.

The $12.5 billion maker of artificial lifts used in oil extraction and gas-station fuel pumps announced first-quarter numbers on Thursday that blew analysts' EPS estimates out of the water, even after adjusting for a gain on divestitures. On top of that, Dover raised its guidance for the remainder of the year -- a welcome change after an epic string of reductions in 2016. Perhaps most telling was one reason why it foresees better EPS: organic growth is back, baby.

Pleasantly Surprised
Revised 2017 guidance wasn't unexpected as Dover's first stab was interpreted as conservative, but the magnitude of the improvement cheered investors
Source: Bloomberg
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Energy orders were up 27 percent year over year in the period, which Robert W. Baird & Co. analyst Mircea Dobre notes is the first increase since the fourth quarter of 2014. Dover now expects organic growth in its energy business to amount to as much as 23 percent this year, boosting overall core expansion to a projected range of 4 percent to 6 percent. Albeit that's off depressed levels -- Dover's overall organic growth declined 5 percent last year -- but it's moving in the right direction. I commented in January that Dover finally appeared to be getting its messaging right on the oil and gas market and that now seems to be playing out with tangible signs of improvement.

Welcome Back
After years of declines, Dover is anticipating an increase in adjusted EPS
Source: Bloomberg, Dover presentations
Data for 2017 reflects the midpoint of Dover's new guidance range, adjusted for the gains related to divestitures. The company forecast $4.05 to $4.20 in EPS. Backing out a 35 cent net benefit from the disposition, Baird's Dobre gets a range of $3.70 to $3.85

This positive turn of events at a company whose results had been pounded by the energy downturn and the drop-off in global growth should be taken as a good sign that industrial CEOs weren't all talk with their optimistic 2017 outlooks. Investors had been somewhat spooked by the poor results delivered already by parts distributors W.W. Grainger Inc., Fastenal Co. and MSC Industrial Direct Co., whose earnings are closely watched as a harbinger of industrial demand. But the problems there had more to do with margins and pricing than revenue growth, with the underlying sales numbers not being all that bad (apart from Grainger, which has bigger Amazon-shaped problems right now).  

The impact of rising material costs on margins will certainly be a watch item when larger multi-industrial companies report in the coming weeks. General Electric Co. and Honeywell International Inc. are up first, with both due to announce their first quarter earnings on Friday. But as long as the impact isn't disastrous, investors may be more tuned in to orders and organic growth after last year's drought. Notably, Dover also increased organic growth guidance for its other major divisions -- engineered systems, fluids and refrigeration and food equipment.

Great Expectations (Not)
Investors aren't expecting a lot from GE, even as activist Trian Fund Management ratchets up the pressure. That could actually be an asset if results are decent.
Source: Bloomberg

The caveat here is that stocks at a number of multi-industrial companies are flying high and already priced for perfection. With such lofty expectations -- and with helping hands like the tax reform and infrastructure policies espoused by President Donald Trump getting pushed further into the future -- there's a risk that decent quarters turn into disappointing stock movements.

What we should be looking for here is positive momentum, not a turbo-boost. As Stifel Financial Corp. analyst Rob McCarthy noted earlier this week, meaningfully improved organic growth and accelerated capital spending on larger industrial and oil and gas projects probably won't kick in until the back half of this year, or maybe even 2018.

Dover gave investors hard numbers to justify their hopes and dreams, but they need to be rational about it. The tempered reaction to Thursday's upbeat news is a good start.

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:
Beth Williams at bewilliams@bloomberg.net