This Company's Products Are Diversified Among High-Growth Sectors
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Dover Corp. (NYSE: DOV) produces a diverse array of products for use in various industrial applications. With an ambitious growth strategy as well as exposure to industries such as communications and energy that should thrive in the coming years, Dover looks to be a diverse way to add exposure to sometimes volatile sectors to your portfolio. The only question is whether or not shares are a good value, or would our investment dollars be put to better use with one of Dover’s competitors?
About Dover’s business segments
Dover has grown and diversified its business tremendously, and has completed over 100 acquisitions since 2000. Currently, Dover’s business is broken down into four segments, each with a very different product portfolio and customer base.
The largest segment is Engineered Systems, which accounts for 42% of Dover’s sales, and manufactures fluid solutions products such as pumps, compressors, and dispensing systems, as well as industrial refrigeration systems such as the display refrigerators and freezers used in supermarkets. The Energy segment (27% of sales) produces products for use in oil and gas exploration and drilling such as pumps and lifting equipment, valves, nozzles, and more.
The Communication Technologies segment (19%) produces electronic and other products for an extremely wide range of communications applications, from fighter jets to mobile handsets to medical devices such as hearing aids. Finally, the Printing & Identification segment (12%) produces equipment for marking and coding products, such as with barcodes.
Growth, valuation, and expectations
As mentioned earlier, acquisitions have been a major part of Dover’s growth strategy, with $2.6 billion worth of acquisitions completed in just the last three years. Dover is truly an international company, and a focus of its acquisition strategy is to increase its global footprint. Currently, just under half of the company’s business is international, mostly from Europe and Asia.
Going forward, I think that most of the growth in Dover’s existing business with be through the Energy and Communications businesses. With world energy demand expected to pick up tremendously in the coming years, mainly due to emerging markets, the rate at which new oil rigs are built is expected to increase significantly. Communications should benefit from the fast evolution of the mobile handset market, and more rapid development will mean a greater need for the parts produced by Dover.
Currently, Dover trades for 17.4 times TTM earnings, which seems reasonable given the company’s projected growth rate. Dover expects revenue growth of about 7.5% this year, as well as slightly higher profit margins. As a result, earnings of $5.24 per share are expected this year, rising to $5.89 and $6.37 in 2014 and 2015, respectively. This implies a projected three year average annual forward earnings growth rate of 12.8%, more than justifying the P/E.
Alternatives: Ingersoll-Rand and Weatherford
Ingersoll-Rand (NYSE: IR) makes an equally diverse, yet different, mix of products for various industrial uses. Over half of Ingersoll-Rand’s business comes from their Climate Solutions segment, which provides HVAC products under such brand names as Thermo King and Trane. The company also produces residential products such as locks and security equipment under the American Standard and Schlage brands, utility vehicles such as Club Car, and more. Ingersoll-Rand is similarly valued to Dover at 17.2 times earnings and is projected to grow its earnings at a 13.7% rate going forward, slightly ahead of Dover.
Weatherford International (NYSE: WFT) is much less diverse in terms of product offerings, manufacturing equipment for the drilling, construction, and operation of oil and gas wells, and is the biggest competitor to Dover’s energy segment. The anticipated increase in oil rig construction over the next several years is expected to help Weatherford’s profits tremendously. The company trades at 23.3 times last year’s earnings, but are projected to nearly triple its annual earnings by 2015. Bear in mind that the oil and gas industry can be very volatile and Weatherford is essentially putting all of its eggs in that basket.
Although all three of these look good at their respective current share prices, I prefer a company with a diverse product line such as Dover or Ingersoll-Rand. I prefer Dover in this case because I think their exposure to energy and mobile communications will produce better-than-expected growth over the next several years and beyond.
Matthew Frankel 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!