Streetwise for Sunday, September 23, 2018

Although it is probably presumptuous on my part, but I often find myself disagreeing with Nobel laureate Robert Shiller. Yet, his recent words on Bloomberg Television did follow the same pattern of enthusiasm for the equity markets that I have written about here on numerous occasions.

Shiller, well known for his analysis of asset-price bubbles and who last year warned that the market was over-priced, is now saying that despite

record highs, the equity markets could continue to reach to new highs.

“The stock market could get a lot higher before it comes down,” Shiller said in an interview with Bloomberg Television recently. The comments contrast with the rising focus on gauging when the next bear market will be upon us.

While Schiller’s words should not be taken as Gospel, they should put in perspective the idea that opportunities for investing remain plentiful, both now and into the future.

A good example for potential research is the Dover Corporation, a company that I have not written about for several years. One immediate standout characteristic is that Dover has been raising dividends for 62 consecutive years, with a dividend growth rate over the past 10 years of 8.98 percent.

Dover provides equipment and components, specialty systems, consumable supplies, software and digital solutions, and support services worldwide. Founded in 1947 and headquartered in Downers Grove, Illinois, the company’s product line is broken down into three segments, Engineered Systems, Fluids, and Refrigeration & Food Equipment.

Dover’ corporate makeup is not the sexiest group of businesses on the planet, and its projected 3 to 4 percent organic revenue growth rate is not the most compelling growth story of 2018.

Moreover, the company has a recent history of operational mishaps. During a recent investor meeting, company CEO Richard Tobin candidly acknowledged that management had been guilty of overestimating retail refrigeration demand, and consequently, the business needed downsizing.

Moreover, Dover Fueling Systems had some “self-inflicted execution challenges,” which Tobin plans to fix via plant realization and cutting selling, general and administration expenses.

However, investing in stocks is not just about buying great businesses, it’s about buying great businesses at reduced prices because others are not a prescient as you are at separating the chaff from the wheat.

There are two key arguments to consider here: Dover’s history of free-cash-flow generation and that its current FCF valuation give it a substantive margin of safety as management restructures the company.

Moreover, the company’s previous operational underperformance suggests management can release value through restructuring the business, and the new CEO, Rich Tobin, recently laid out a plan to do just that.

Management expects to generate $130 million in annualized SG&A savings by 2019, and then use $30 million of this figure to reinvest in growth opportunities.

So, let’s call it a $100 million improvement in costs. The estimated one-off costs for the restructuring are expected to total $40 million, to be split across the second-half of 2018 and the first-half of 2019.

To put the net savings figure of $100 million into context, Dover’s trailing 12-month pre-tax earnings figure is $817 million.

Consequently, the Street’s consensus is that earnings per share will increase at about a 12 percent rate in 2019 to $5.38.  This compares favorably to the 7 to 9 percent EPS growth rate forecast for 3M and Illinois Tool Works.

Dover’s guidance calls for between $2.5 billion and $3.5 billion in operating cash flow during the 2019-2021 timeframe, with capital expenditures to revenue of 2 to 4 percent.

The intrinsic value of the shares, using a free cash flow to the firm model is $240 per share. My earnings estimate for fiscal 2018 is $4.83 and 5.35 per share in 2019, with a 12-month target price on the stock of $95, for an annualized gain of about 10 percent. The shares recently closed at $88.62 and there is also an indicated dividend yield of 2.22 percent.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddInternational.com.