Dover Earnings: Full-Year Guidance Disappoints Us, but This Setback Is Transitory

Narrow-moat-rated Dover’s DOV full-year guidance underwhelmed us, but we maintain our $174 fair value estimate. However, Dover did slightly beat our third-quarter expectations, both for revenue and EPS. We should have anticipated the reduced full-year sales guidance given weak book-to-bills in parts of Dover’s business and the implied greater-than-typical seasonal leap in the fourth quarter. That’s particularly true in both the climate and pumps portions of Dover’s business. We were also anticipating a recovery in Dover’s biopharma business this year that simply didn’t materialize.

Climate tech specifically has seen its book-to-bill hug 0.7 for the past three quarters. However, we gave current management the benefit of the doubt given its track record of success, despite the difficulty in calling its OEM business relative to its distribution channel. Even so, we’re not overly concerned about Dover’s long-term competitive positioning. We think current demand is more a function of short-cycle weakness as opposed to any secular challenge Dover faces. In other words, the market’s focus is overly short-term oriented. Moreover, Dover’s EBITDA margin profile remains strong and should make up some of the sales shortfall. We’ve only cut our prior full-year 2023 EPS estimate by a nickel to $8.85.

Furthermore, there are some positive data points in the third-quarter earnings. For example, engineered products’ book-to-bill has grown to over 1.1, despite that segment’s declining organic revenue growth by negative 3%, suggesting it’s set up nicely moving forward. Declining organic sales growth in that business was due to lower shipments in vehicle service following a record 2022, which more than offset the benefits from strong volumes in waste handling and aerospace and defense. Even so, engineered products still managed to grow adjusted EBITDA margins by a resounding 280 basis points thanks to mix, but also positive price-cost and management’s proactive cost containment.