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Dover (DOV) Benefits From Healthy Backlog Amid Cost Woes

Dover Corporation DOV has been benefiting from its healthy order backlogs across most of its segments. This is impressive, given the ongoing input cost inflation and supply-chain issues.

Dover is also gaining from e-commerce, product development and inorganic investment in core business platforms. Solid new order intake will also aid growth in the ongoing quarter.

Shares of DOV have gained 14.9% in the past year compared with the industry’s rise of 21.6%.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

Solid Backlog Levels & Volume Growth to Drive FY23 Results

Dover’s order backlogs remain healthy across most of its segments. This was driven by strong demand across the majority of the company’s business and its ability to produce and ship despite several operating challenges.

The company’s margin is gaining from strong volume, an improved price-cost spread as well as tight cost controls, offsetting the negative impact of supply chain constraints, input inflation and production disruptions. Solid new order intake continues to aid growth.

Dover seems well poised to deliver revenue growth, margin expansion and double-digit earnings per share (EPS) growth in 2023, driven by strong backlog levels, healthy demand, margin conversion efforts, investments in capacity expansions, benefits from acquisitions and productivity improvement.

The company expects to generate adjusted EPS of $8.85-$9 for 2023, indicating 6% year-over-year growth at the mid-point. DOV anticipates organic revenue growth of 2-4% for the year.

Strong Segment Performances Bode Well

Even though the Engineered Products segment’s revenues dropped year over year in the second quarter of 2023, it is expected to grow in the second half of this year. Orders remain strong in waste handling and aerospace & defense.

A solid backlog and strong bookings will continue to support the segment’s top line. Moreover, the revenues of the segment will be driven by improving supply chains, price cost dynamics products mix, and events investments and productivity initiatives.

The Clean Energy and Fueling segment will gain from solid growth in below-ground retail fueling, fuel transport vehicle wash and industrial gases, coupled with acquisitions in Clean Energy and components. The global investment in sustainability continues to drive demand for heat exchangers and CO2 refrigeration systems.

Its margins will increase on improved productivity in food retail, strong volumes driving fixed-cost absorption and price-cost tailwinds.

Effective Growth Strategies

Dover will gain from product digitization, e-commerce, new product development and inorganic investment in core business platforms. The company is focused on investments in capacity expansions in high-growth businesses and productivity improvements across its portfolio.

DOV executed restructuring programs to better align the costs and operations with current market conditions through targeted facility consolidations, headcount reductions and other measures, which will support the company’s margins.

Solid Balance Sheet

Dover continues to lower its debt levels and strengthen the balance sheet. For the past few quarters, the company has recorded a sequential drop in its total-debt-to-total-capital ratio, which now stands at 0.39. The company also started an accelerated share repurchase program to return excess capital to shareholders while preserving sufficient liquidity for value-creating investments.

Inflated Costs, Supply-Chain Issues Persist

The company expects unfavorable foreign currency impacts, supply chain challenges and labor constraints to continue in the remaining period of the current year.

Even though demand remains strong, considering the ongoing macroeconomic uncertainty, Dover has decided to lower output in several businesses. This will help draw down inventory balances. Meanwhile, the company will also be initiating cost control measures wherever necessary.

Zacks Rank & Stocks to Consider

Dover currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks from the Industrial Products sector are Caterpillar Inc. CAT, Astec Industries, Inc. ASTE and A. O. Smith Corporation AOS. CAT and ASTE sport a Zacks Rank #1 (Strong Buy) each at present and AOS has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Caterpillar has an average trailing four-quarter earnings surprise of 18.5%. The Zacks Consensus Estimate for CAT’s 2023 earnings is pegged at $19.81 per share. The consensus estimate for 2023 earnings has moved north by 11.4% in the past 60 days. Its shares have gained 51.6% in the last year.

Astec has an average trailing four-quarter earnings surprise of 20%. The Zacks Consensus Estimate for ASTE’s 2023 earnings is pegged at $2.81 per share. The consensus estimate for 2023 earnings has moved 4% north in the past 60 days. ASTE’s shares have gained 22.8% in the last year.

The Zacks Consensus Estimate for A. O. Smith’s 2023 earnings per share is pegged at $3.57. The consensus estimate for 2023 earnings has moved 5% north in the past 60 days. It has a trailing four-quarter average earnings surprise of 10.5%. AOS has gained 11.1% in the last year.

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