John Kozey, senior analyst at Thomson Reuters, listed 28 businesses that could become the favorites of legendary investor Warren Buffett. In previous articles, I covered a number of stocks from that list, including Mosaic Co (NYSE:MOS), CSX Corporation (NYSE:CSX), Johnson Controls, Inc. (NYSE:JCI), Archer Daniels Midland Company (NYSE:ADM) and Coca-Cola Enterprises Inc (NYSE:CCE).
In this article, I would like to talk about one more industrial stock in that list, Dover Corp (NYSE:DOV). Since the market hit bottom in March 2009, Dover has advanced significantly, from around $25 per share to nearly $74 per share. Let’s dig deeper to seewhether or not investors should own Dover at its current price.
Business overview
Dover, incorporated in 1947, is considered a global diversified manufacturer of innovative equipment, specialty systems, and support services, operating in four main business segments: Communication Technologies, Energy, Engineered Systems, and Printing & Identification. The majority of its revenue, $3.42 billion or 42.2% of 2012’s total revenue, was generated from the Engineered Systems segment.
The Energy segment ranked second, with $2.17 billion in revenue in 2012, while the Communication Technologies and the Printing & Identification segment contributed nearly $1.52 billion and $996.5 million in revenue, respectively. Among the four segments, the Energy segment enjoyed the highest operating margin at 24.8%. The Engineered Systems operating margin ranked second, with a 14.7% operating margin.
Consistent growing operating performance
Since 2009, Dover Corp (NYSE:DOV) has experienced a consistent increase in its top line, bottom line, and cash flow. Its revenue increased from $5.78 billion in 2009 to $8.1 billion in 2012, while net income rose from $356 million to $811 million during the same period. Its operating cash flow and free cash flow have also been on the rise. Operating cash flow climbed from $796 million in 2009 to $1.27 billion in 2012, while free cash flow advanced from $676 million to $976 million during the same period.
Moreover, Dover Corp (NYSE:DOV) is a dividend paying company which has consistently increased its dividend. In the past ten years, its dividend has experienced an 8.84% annualized growth to $1.33 per share in 2012. Interestingly, at the current dividend payment, its payout ratio seems to be conservative at only 29.4%.
Dover seems to employ a reasonable amount of leverage in its operations. As of December 2012, it had $4.92 billion in total stockholders’ equity, $800 million in cash and, $2.8 billion both long and short-term debt. What worries me is the high level of goodwill and intangible assets of $5.74 billion on its balance sheet. Thus, the tangible book value was negative at $4.6 per share.
The most profitable with highest dividend yield
At nearly $74 per share, Dover is worth around $12.9 billion on the market. The market values Dover at 9.1 times EV/EBITDA. Compared to its peers, including Ingersoll-Rand (NYSE:IR) and Weatherford International (NYSE:WFT), Dover seems to be quite reasonably valued.
Ingersoll-Rand is trading at around $55 per share, with a total market cap of $16.3 billion. The company has the most expensive valuation among the three, at 9.84 times EV/EBITDA. Weatherford is the smallest company, with $8.8 billion in total market cap. At nearly $12 per share, the market gives Weatherford the cheapest valuation at only 7.24 times EV/EBITDA.
What investors should notice is the fact that Dover is the most profitable company among the three. It generated nearly 16% operating margin, while the operating margin of Ingersoll-Rand was only 10.9%. Weatherford has the lowest operating margin at only 7.6%.
Although Dover Corp (NYSE:DOV)’s operating margin is nearly 47% higher than that of Ingersoll-Rand, its valuation is only 8% lower than that of Ingersoll-Rand. Furthermore, Dover Corp (NYSE:DOV) is paying the highest dividend yield among the three at 1.9%, while the dividend yield of Ingersoll-Rand is only 1.5%. Weatherford does not pay any dividends to its shareholders.
My Foolish take
With improving operating performance, high profitability, the juiciest dividend yield, a conservative capital structure, and reasonable valuation, Dover seems to be a decent stock for long-term investors.
The article This Company Could Become One of Buffett’s Favorites (Part 8) originally appeared on Fool.com and is written by Anh HOANG.
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