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 Undervalued Companies for the Enterprising Investor. 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 Corporation (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 2014, the Company announced that it has completed the sale of DEK Printing Machines unit (DEK). In July 2014, Dover acquired The WellMark Company.
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||$70.10|
|Value Based on 0% Growth||$41.09|
|Market Implied Growth Rate||4.94%|
Balance Sheet – 6/30/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Dover Corporation qualifies for either the Defensive Investor or the Enterprising Investor. The Defensive Investor’s only concern is the high PB ratio, and the Enterprising Investor’s only issue is with the high level of debt relative to the net current assets. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with research into the company and comparing it to other opportunities. As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $3.14 in 2010 to an estimated $4.83 for 2014. This level of demonstrated growth outpaces the market’s implied estimate of 4.94% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.
Be sure to check out the previous ModernGraham valuations of Dover Corporation (DOV) for more perspective!
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 Corporation (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 Corporation (DOV) but did not hold a position in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.