Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Lowest PEmg Comapnies for Defensive Investors. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Dover Corp (DOV) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Dover Corporation (Dover) manufactures a range of specialized products and components and also offers related services and consumables. The Company operates in four segments: Communication Technologies, Energy, Engineered Systems, and Printing & Identification. In July 2011, it acquired Sound Solutions from NXP Semiconductors N.V. In November 2011, the Company realigned into four business segments, which includes Communication Technologies, Energy, Engineered Systems and Printing & Identification. In December 2011, the Company sold Heil Trailer International. In March 2012, the Company acquired Maag Group (Maag). In November 2013, Dover Corp announced that it had completed the acquisition of Finder Pompe S.p.A. In December 2013, LTX-Credence Corp completed its acquisition of the Multitest and Everett Charles Technologies (ECT) businesses of Dover Corporation.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$69.91|
|Value Based on 0% Growth||$40.98|
|Market Implied Growth Rate||4.77%|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Dover Corp qualifies for both Defensive Investors and Enterprising Investors. The Defensive Investor’s only concern is the high PB ratio, while the Enterprising Investor’s only issue is with the level of debt relative to net current assets. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and its competitors by exploring the ModernGraham Valuation Index. As for a valuation, the company appears undervalued after growing its EPSmg (normalized earnings) from $3.14 in 2010 to an estimated $4.82 for 2014. This solid level of demonstrated growth outpaces the market’s implied estimate of 4.77% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Dover Corp (DOV)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: The author held a long position in Dover Corp (DOV) at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.