June 25, 2018 - 2:35pm EST by
2018 2019
Price: 72.47 EPS 5.32 6.30
Shares Out. (in M): 157 P/E 13.62 11.50
Market Cap (in $M): 11,384 P/FCF 15.93 14.95
Net Debt (in $M): 3,091 EBIT 969 1,073
TEV ($): 14,475 TEV/EBIT 14.94 13.49

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  • RemainCo


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




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




·        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.




·        Wikipedia link:


·        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.



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.




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.




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




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.