Strong earnings from industrial AI play Dover prove the stock belongs in our portfolio
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Dover on Thursday delivered better-than-expected second-quarter earnings and raised its full-year guidance — an all-around strong report that validates our decision to take a stake in the industrial name two months ago. Revenue in the three months ended June 30 totaled $2.18 billion, topping the consensus of $2.15 billion, according to estimates compiled by LSEG. Sales rose 5% year over year on an organic basis, which removes the impact of foreign exchange, acquisitions, and divestitures. Adjusted earnings per share (EPS) rose 15% annually to $2.36, exceeding the $2.21 estimate, LSEG data showed. Dover Why we own it : We own Dover as an industrial turnaround story with exposure to mega-themes, most notably the data center buildout to support artificial intelligence computing. The company’s key products for data centers are thermal connectors and heat exchangers. Dover’s business serving the biopharma industry is another attractive area. Dover’s active portfolio management and commitment to capital returns sweeten the investment case. Competitors : Ingersoll Rand , IDEX Corp ., Snap-On , Veralto , among others Weight in portfolio : 1.65% Most recent buy : June 18, 2024 Initiated : May 28, 2024 Bottom line One way to ensure your stock’s six-session losing streak will come to an end: Report the kind of quarter Dover did Thursday morning, which sent shares jumping more than 6%, to over $187 each. Its all-time high of $191.49 came on July 16, before that stretch of losses began. “This stock and this company is doing a lot right. I think this goes higher,” Jim Cramer said on Thursday’s Morning Meeting. Dover checked a number of important boxes: (1) beats on the top and bottom lines, (2)improved earnings guidance, and (3) a third consecutive quarter of positive companywide order growth. CEO Richard Tobin also offered upbeat commentary on the businesses that investors currently care about the most — thermal connectors used in data centers, biopharma components, and CO2 systems for refrigeration. “Our inventory positions are well-placed, and some of the markets that we have exposure to that suffered over the past 24 months are making a turn,” Tobin said on the post-earnings conference call. “On top of that, some of the growth platforms we have like thermal connectors and CO2 systems … are performing very nicely.” Encouragingly, Tobin said he expects Dover’s book-to-bill ratio to be above 1 for the rest of the year, a key threshold that indicates more orders are being placed than filled. “It’s been a little bit lumpy intra-quarter, so we’ll see how it goes. But our expectation is to be above 1 for the balance of the year,” Tobin said. Dover’s recent portfolio moves — selling its Environmental Solutions Group unit that makes garbage trucks and trash compactors, while buying two components suppliers in industrial gases, Michigan-based Marshall Excelsior and Dutch firm Demaco — were major point of discussion on the call. Tobin said the moves will boost Dover’s clean-energy portfolio and decrease its exposure to more cyclical capital equipment businesses. Tobin also made it clear that Dover will remain active on the mergers-and-acquisition (M & A) front, which we were pleased to hear because it suggests the company will continue leaning into more attractive end markets. Dover won’t sell any of its businesses below their intrinsic value for the sake of a near-term margin bump, Tobin said. “The important issue to understand is that we’ve got optionality in terms of firepower that a lot of people don’t have, meaning that we can lever up on the M & A front and then de-lever by monetization. That’s not what we did here [ with our recent moves ]. I think we were just more opportunistic, but it’s an arrow in our quiver going forward.” While it’s not our style to buy a stock up more than 6%, as Dover is Thursday, we’re maintaining our 1 rating and price target of $200 a share. DOV YTD mountain Dover YTD Quarterly commentary Dover knocked it out of the park with its organic bookings growth, up 16% in the quarter, representing a major acceleration from the 3% growth tallied in the January-to-March period. For industrial companies, this is always a closely watched metric as a predictor of future growth. Dover delivered big time. As shown in the chart below, Dover reported topline growth in four of its five operating segments, led by Engineered Products, which jumped 8.7% year over year to $514.8 million. Management chalked up the strength there to strong volumes in waste handling and aerospace and defense. Margins in the segment expanded an impressive 430 basis points compared with the year-ago period. Revenue and earnings for Pumps & Process Solutions came up short of estimates, but there was still plenty to like in the segment, which is home to its thermal connector and biopharma components business. While off a small base, Tobin said bookings for thermal connectors used in liquid cooling AI servers are “up significantly.” And after a rough patch of inventory overhangs in biopharma — just like fellow Club holding Danaher experienced — Dover is seeing a recovery in that business, rising sequentially and year over year. That mirrors what Danaher said in its strong earnings report earlier this week . Dover’s Climate & Sustainability Technologies division topped sales, earnings and margin expectations despite continued challenges in the company’s European heat exchanger operations. The good news, though, Tobin said he’s “pretty confident” that business should bottom in the third quarter, with order rates moving up into the final three months of the year, if not sooner.” What really propelled the Climate & Sustainability Tech segment was its food retail operations, which includes sales of CO2 refrigerant systems. “CO2 is doing pretty much as planned. I think that what’s doing better than planned as the margin performance of the business has just been exemplary through the quarter,” Tobin said. Guidance Dover now expects adjusted full-year earnings per share between $9.05 and $9.20, up from its previous range of $9.00 to $9.15. The improved outlook is based on full-year sales growth of 3% to 4%, or 2% to 3% organically. Previously, Dover projected topline growth of 2% to 4%, or 1% to 3% organically. For now, Dover’s guidance still includes its Environmental Solutions Group while the transaction progresses. Tobin said the company will move the unit into discontinued operations in the third quarter report and adjust guidance and historical financials accordingly. (Jim Cramer’s Charitable Trust is long DOV. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Rafael Henrique | SOPA Images | Lightrocket | Getty Images
Dover on Thursday delivered better-than-expected second-quarter earnings and raised its full-year guidance — an all-around strong report that validates our decision to take a stake in the industrial name two months ago.
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