This Company Could Become One of Buffett's Favorites (Part 8)

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

John Kozey, senior analyst at Thomson Reuters, listed 28 businesses that could become the favorites of legendary investor Warren Buffett. In previous articles, I covered a number of stocks from that list, including Mosaic, CSX, Johnson Controls, Archer Daniels Midland and Coca-Cola Enterprises.

In this article, I would like to talk about one more industrial stock in that list, Dover (NYSE: DOV). Since the market hit bottom in March 2009, Dover has advanced significantly, from around $25 per share to nearly $74 per share. Let’s dig deeper to see whether or not investors should own Dover at its current price.

Business overview

Dover, incorporated in 1947, is considered a global diversified manufacturer of innovative equipment, specialty systems, and support services, operating in four main business segments: Communication Technologies, Energy, Engineered Systems, and Printing & Identification. The majority of its revenue, $3.42 billion or 42.2% of 2012's total revenue, was generated from the Engineered Systems segment.

The Energy segment ranked second, with $2.17 billion in revenue in 2012, while the Communication Technologies and the Printing & Identification segment contributed nearly $1.52 billion and $996.5 million in revenue, respectively. Among the four segments, the Energy segment enjoyed the highest operating margin at 24.8%. The Engineered Systems operating margin ranked second, with a 14.7% operating margin.

Consistent growing operating performance

Since 2009, Dover has experienced a consistent increase in its top line, bottom line, and cash flow. Its revenue increased from $5.78 billion in 2009 to $8.1 billion in 2012, while net income rose from $356 million to $811 million during the same period. Its operating cash flow and free cash flow have also been on the rise. Operating cash flow climbed from $796 million in 2009 to $1.27 billion in 2012, while free cash flow advanced from $676 million to $976 million during the same period.

Moreover, Dover is a dividend paying company which has consistently increased its dividend. In the past ten years, its dividend has experienced an 8.84% annualized growth to $1.33 per share in 2012. Interestingly, at the current dividend payment, its payout ratio seems to be conservative at only 29.4%.

Dover seems to employ a reasonable amount of leverage in its operations. As of December 2012, it had $4.92 billion in total stockholders’ equity, $800 million in cash and, $2.8 billion both long and short-term debt. What worries me is the high level of goodwill and intangible assets of $5.74 billion on its balance sheet. Thus, the tangible book value was negative at $4.6 per share.

The most profitable with highest dividend yield

At nearly $74 per share, Dover is worth around $12.9 billion on the market. The market values Dover at 9.1 times EV/EBITDA. Compared to its peers, including Ingersoll-Rand (NYSE: IR) and Weatherford International (NYSE: WFT), Dover seems to be quite reasonably valued.

Ingersoll-Rand is trading at around $55 per share, with a total market cap of $16.3 billion. The company has the most expensive valuation among the three, at 9.84 times EV/EBITDA. Weatherford is the smallest company, with $8.8 billion in total market cap. At nearly $12 per share, the market gives Weatherford the cheapest valuation at only 7.24 times EV/EBITDA.

What investors should notice is the fact that Dover is the most profitable company among the three. It generated nearly 16% operating margin, while the operating margin of Ingersoll-Rand was only 10.9%. Weatherford has the lowest operating margin at only 7.6%.

Although Dover’s operating margin is nearly 47% higher than that of Ingersoll-Rand, its valuation is only 8% lower than that of Ingersoll-Rand. Furthermore, Dover is paying the highest dividend yield among the three at 1.9%, while the dividend yield of Ingersoll-Rand is only 1.5%. Weatherford does not pay any dividends to its shareholders.

My Foolish take

With improving operating performance, high profitability, the juiciest dividend yield, a conservative capital structure, and reasonable valuation, Dover seems to be a decent stock for long-term investors.

Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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