Dover Earnings: Softer Quarter, but Plenty of Signs of Long-Term Strength in Key Secular Trends

Narrow-moat-rated Dover DOV had a bit of a rougher quarter, as all but one of its segments fell below our expectations from a top-line perspective. Nonetheless, we see no reason to alter our long-term thesis. Consequently, we maintain our $174 fair value estimate. Second-quarter sales of $2.1 billion were off about 6% from what we were hoping to see. Similarly, at the operating level, three of the five segments missed the mark from what we penciled in, though the discrepancy in operating income was even smaller.

Despite these headwinds, however, Dover still managed to beat our prior segment adjusted EBITDA margin expectations by 20 basis points, a testament to its resilient portfolio and operating rigor. Margin resilience also meant that Dover came relatively in line with our earnings expectations. CEO Rich Tobin for some time has taken great pains to point out that while book to bills (orders divided by revenue, which measures demand) have dipped, this isn’t necessarily a long-term leading indicator. In fact, 2021 was a supernormal year, and Dover has been doing a better job delivering product. There’s evidence of this trend based on accelerating backlog burn rates, which was good to see. While we won’t ignore the potential warning signs, we see no reason to alter our conviction.

We’ve predicated our thesis on Dover’s exposure to secular trends, such as in the ESG space. Unsurprisingly, heat exchangers and natural refrigerant systems outperformed during the quarter, both posting sales growth over 20%. There’s no shortage of orders in this business—Dover sold out of heat exchangers. These businesses clearly benefit from global investments in sustainability, and while no mention was made this quarter, regulation, particularly in Europe, has the potential to carry over into the U.S. during the long term.