Dover Corporation – Dividend Stock Analysis

• The Industrial Products segment provides material handling products and services, as well as products used in various mobile equipment applications in the transportation equipment, vehicle service and solid waste management markets. The segment manages and sells its products and services through two business platforms Material Handling and Mobile Equipment.
• The Material Handling platform serves two global markets comprising infrastructure and industrial automation. The companies in this platform develop and manufacture customer productivity enhancing systems. The products are produced in the United States, Mexico, Germany, Belgium, Thailand, India, China, Brazil and France and are marketed globally on a direct basis to original equipment manufacturers (OEMs) and through a global dealer and distribution network to industrial end users.
• The Material Handling platform companies in the infrastructure market sell to segments of the construction, utility, demolition, recycling, scrap processing, material handling, forestry, energy, military, marine, towing/recovery, refuse and automotive OEM markets. The products include mobile shears, concrete demolition tools, buckets, backhoes, trenchers, augers, worm gear and planetary winches, and hydraulic lift and electronic control/monitoring systems for mobile and structural cranes, four-wheel drive (4WD) and all wheel drive (AWD) powertrain systems, and other accessories for off-road vehicles and operator cabs and rollover structures. The Material Handling platform companies in the industrial automation market provide a range of modular automation components, including manual clamps, power clamps, rotary and linear mechanical indexers, conveyors, pick and place units, as well as end-of-arm robotic grippers, slides and end effectors.
• The Mobile Equipment platform serves three markets, such as transportation equipment, solid waste management and vehicle service. The companies in this platform manufacture tank trailers, specialty trailers, refuse collection bodies (garbage trucks), container lifts, onsite waste management and recycling systems, vehicle service lifts, touch-free and friction vehicle wash systems, vehicle collision measuring and repair systems, aerospace and submarine-related fluid control assemblies, fasteners and bearings, internal engine components and other engine accessories. The businesses also provide components for off-road sports vehicles and autos. The platform has manufacturing operations in North and South America, Asia and Europe.
• The businesses in the transportation equipment markets, manufactures and sells aluminum, stainless steel and steel tank trailers that carry petroleum products, chemical, edible and dry bulk products, as well as specialty trailers focused on the heavy haul, oil field and recovery markets. Trailers are marketed both directly and indirectly through distributors to customers in the construction, trucking, railroad, oilfield and heavy haul industries.
• The businesses in the solid waste management market provide products and services for the refuse collection industry and for onsite processing and compaction of trash and recyclable materials. Products are sold to municipal customers, national accounts and independent waste haulers through a network of distributors and directly in certain geographic areas. The onsite waste management and recycling systems include a range of stationery compactors, wire processing and separation machines, and balers that are manufactured and sold in the United States to distribution centers, malls, stadiums, arenas, office complexes, retail stores and recycling centers.
• The businesses in the vehicle service market provide a range of products and services that are utilized in vehicle services, maintenance, repair and modification. Vehicle lifts and collision equipment are sold through equipment distribution and directly to a range of markets, including independent service and repair shops, collision repair shops, national chains and franchised service facilities, new vehicle dealers, and governments and directly to consumers through the Internet. Car wash sustems are sold in the United States and Canada to oil companies, convenience store chains and individual investors. The products are sold through a distribution network that installs the equipment and provides after sale service and support. The internal combustion engine components, including pistons, connecting rods and accessories, and fuel and combustion management devices are designed to meet customer specifications for the racing and enthusiast markets in both the motor sports and automotive market segments. These products are sold directly and through distribution networks on a global basis.

• The Engineered Systems segment provides products and services for the refrigeration, storage, packaging and preparation of food products, as well as industrial marking and coding systems for various markets. The segment serves its markets by managing these products and services through two business platforms comprising Product Identification (PI) platform and Engineered Products.
• The PI platform is a global supplier of industrial marking and coding systems that serves the food, beverage, cosmetic, pharmaceutical, electronic, automotive and other markets where variable marking is required. Its printing products are used for marking variable information, such as date codes or serial numbers on consumer products. PI provides solutions for product marking on primary packaging, secondary packaging, such as cartons and pallet marking for use in warehouse logistics operations. PI also manufactures bar code printers and portable printers used where on demand labels/receipts are required. The PI manufacturing facilities are in the United States, France and China with sales operations globally.
• The Engineered Products platform manufactures refrigeration systems, refrigeration display cases, walk-in coolers and freezers, electrical distribution products and engineering services, commercial foodservice equipment, cook-chill production systems, custom food storage and preparation products, kitchen ventilation systems, conveyer systems, beverage can-making machinery, and packaging machines used for meat, poultry and other food products. The platform also manufactures copper-brazed compact heat exchangers, designs software for heating and cooling substations. The platform’s manufacturing facilities and distributing operations are in North America and Europe with additional distribution facilities in South America and Asia.

• The Fluid Management segment provides products and services for end-to-end stewardship of its customers’ fluids, including liquids, gases, powders and other solutions that are hazardous, valuable or process-critical. The segment provides technologies that help contain, control, move, measure and monitor the fluids. The products and services are channeled through two business platforms, including Energy and Fluid Solutions.
• The Energy platform serves the oil, gas and power generation industries. The products manufactured by companies within this platform include polycrystalline diamond cutters (PDCs) used in drill bits for oil and gas wells, steel sucker rods and accessories used in onshore oil and gas production, pressure, temperature and flow monitoring equipment used in oil and gas exploration and production applications, and control valves and instrumentation for oil and gas production. The Company also manufactures various compressor parts used in the natural gas production, distribution and oil refining markets, as well as bearings and remote condition monitoring systems that are used for rotating machinery applications, such as turbo machinery, motors, generators and compressors used in energy, utility, marine and other industries.
• The Fluid Solutions platform manufactures pumps, compressors, vehicle fuel dispensing products, and products for the transfer, monitoring, measuring and protection of hazardous, liquid and dry bulk commodities. The Company also manufactures quick disconnect couplings and chemical proportioning and dispensing products. The products are manufactured in the United States, South America, Asia and Europe and marketed globally through a network of distributors or via direct channels.
• Vehicle fuel dispensing products include conventional, vapor recovery, clean energy nozzles, swivels and breakaways, as well as tank pressure management systems. Products manufactured for the transportation, storage and processing of hazardous liquid and dry-bulk commodities include relief valves, loading/unloading angle valves, rupture disc devices, actuator systems, level measurement gauges, swivel joints, butterfly valves, lined ball valves, actuators, aeration systems, industrial access ports, manholes, hatches, coamings, collars, weld rings and fill covers.
• The platform’s pumps and compressors are used to transfer liquid and bulk products and are sold to a range of markets, including the refined fuels, liquefied petroleum gas (LPG), pulp and paper, wastewater, food/sanitary, military, transportation and chemical process industries. The quick disconnect couplings provide fluid control solutions to the industrial, food handling, life sciences and chemical handling markets.

• The Electronic Technologies segment designs and manufactures electronic test, material deposition and manual soldering equipment, micro-acoustic components, and specialty electronic components. The products are manufactured in North America, Europe and Asia and are sold globally through a network of distributors.
• The test equipment products include machines, test fixtures and related products used in testing bare and loaded electronic circuit boards, and semiconductors. The segment also manufactures precision material deposition machines and other related tools used in the assembly process for printed circuit boards and other specialty applications, as well as precision manual soldering, de-soldering, and other hand tools.
• The micro-acoustic components manufactured include audio communications components, primarily miniaturized microphones, receivers and electromechanical components for use in hearing aids, as well as transducers for use in pro-audio devices, high-end headsets, medical devices, military headsets and far field arrays. The platform also designs, manufactures and assembles microphones for use in the personal mobile device and communications markets, including mobile phones, personal digital assistant (PDAs), Bluetooth headsets and laptop computers.
• The specialty electronic components include frequency control/select components and modules employing quartz technologies, microwave electro-mechanical switches, radio frequency and microwave filters, and integrated assemblies, multi-layer ceramic capacitors and high frequency capacitors. The components are sold to communication, medical, defense, aerospace and automotive manufacturers worldwide.

DOV, similar to BRC, performed well when the economy was expanding growing revenue in 2007 and 2008. The Company cycled hard in 2009 with the great recession; revenue declined over 20% from the 2008 levels. 2010 saw a significant pick up with revenue expanding over 20%, but not quite to the 2008 levels. The Company’s Gross and EBITDA margins have been trending higher over the past five years. DOV has increased EBITDA from $1.1B in 2006 to $1.3B in 2010 (19% increase) over the five year period.

DOV, dissimilar to BRC, has decreased the number of shares outstanding from 206MM to 189MM in the past five years (an 8% decrease). Performance on a per share basis gives a better insight into how the Company has been performing; EBITDA per share has expanded from $5.35 to $6.92 (a 29% expansion as compared to a 19% increase at the company level). The Company’s dividends per share have been growing briskly from $0.71 per share in 2006 to $1.07 in 2010 (51% increase) while the payout ratio has only expanded modestly from 26% to 29%.

The consensus estimates for Dover Corp are aggressive projecting the growth rate between 24% and 9% annually through 2013 at the EBITDA line (projections unavailable in 2014 and 2015). Given the Company’s cyclical exposure (and growth in 2007 and 2008), I don’t think that they will have much trouble achieving these numbers if the economy doesn’t further contract. Under the consensus case the Company is projected to have significant additional free cash flow available to reinvest in the business, repurchase shares (always assumed for ease in modeling), or increase their dividend.

The share redemptions are assumed to be at a 15% annually compounded price. I believe that this is structured very conservatively. If the weighted average redemption price exceeded this threshold, the investor would have ample opportunity and time to re-evaluate their position and consider selling off their position for a gain from today’s price. The Company’s share redemptions would allow for an increase of approximately 6%-7% annually in the dividend by the share redemptions alone. Additionally, the Company’s payout ratio would decline as the dollar amount of dividends paid would not be increasing while the Company earnings (using EBITDA as a proxy) would be increasing.

If the Company performs inline with the consensus estimates and pays dividends / redeems shares as outlined above, the Company would achieve the IRR / Cash on Cash returns below based on the outlined Terminal EBITDA Multiples.

The flat case for the Company assumes that there is no growth in EBITDA over the next five years. Under this case the Company is projected to have a flat $599MM of additional free cash flow available to reinvest in the business, repurchase shares (always assumed for ease in modeling), or increase their dividend.

The share redemptions are assumed to be at a 15% increased price to the Company’s current price. I believe that this is fairly conservative given that if there is no growth in the business, it is unlikely that the stock price would appreciate and if it did, an investor would have ample opportunity and time to re-evaluate their position and consider selling off their position for a gain from today’s price. The Company’s share redemptions would allow for an increase of approximately 5%-6% annually in the dividend by the share redemptions alone. Additionally, the Company’s payout ratio would not be increasing as the dollar amount of dividends and the Company earnings (using EBITDA as a proxy) would be flat.

If the Company performs flat to their current levels as outlined above, the Company would be able to achieve the IRR / Cash on Cash returns below based on the outlined Terminal EBITDA Multiples.

The downside case for the Company assumes that there is a 3% annual decrease in EBITDA through 2015. Under this case the Company is projected to have $472MM of additional free cash flow available to reinvest in the business, repurchase shares (always assumed for ease in modeling), or increase their dividend at the end of 2015.

The share redemptions are assumed to be at a 15% increased price to the Company’s current price. I believe that this is fairly conservative given that if there is a contraction in the business, it is unlikely that the stock price would appreciate and if it did an investor would have ample opportunity and time to re-evaluate their position and consider selling off their position for a gain from today’s price. The Company’s share redemptions would allow for an increase of approximately 4%-5% annually in the dividend by the share redemptions alone.

If the Company performs to their downside case as outlined above, the Company would be able to achieve the IRR / Cash on Cash returns below based on the outlined Terminal EBITDA Multiples.