I am often asked if I utilize the methods I teach here on ModernGraham, and the answer is yes. I fully believe that Benjamin Graham’s methodology can be used in the market today, especially after taking time to analyze each one of his ideas and modernize it as needed. The ModernGraham method can be a great way to narrow down investment opportunities to the strongest companies, and then a little bit of further research can help one determine in which companies to invest.
This series of posts looks at each of my personal holdings, putting them through a full ModernGraham valuation and adding a level of further research to provide rationale as to why I selected the company for my portfolio. Here’s a page with more information about my portfolio, including my thoughts and goals on asset allocation and an overview of my current holdings.
The first step in my analysis is to put the company through a full ModernGraham valuation. For readers who may be new to the site, here on ModernGraham I cover the full S&P 500, putting each company through an individual valuation like this every quarter if it qualifies for either the Defensive Investor or Enterprising Investor, or every year if it does not qualify for either investor type. Premium members have access to every valuation on the site, for only $4.99/month.
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 10 Most Undervalued Companies for the Defensive Investor – August 2015. 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 stock analysis showing a specific look at how Dover Corporation (DOV) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Dover Corporation (Dover) is engaged in the manufacturing of equipment, components and specialty systems. The Company also provides supporting engineering, testing and other services. The Company operates through four business segments: Energy, Engineered Systems, Fluids, and Refrigeration & Food Equipment. The Energy segment serves the Drilling & Production, Bearings & Compression and Automation end markets, and provides solutions and services for production and processing of oil, natural gas liquids and gas around the world. The Engineered Systems segment manages its products and services through two business platforms, Printing & Identification and Industrials. The Fluids segment is focused on the handling of critical fluids across the retail fueling, chemical, hygienic and industrial markets. The Refrigeration & Food Equipment segment provides equipment and systems serving the commercial refrigeration and food service industries.
Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||Fail|
|3. Earnings Stability||Positive EPS for 10 years prior||Pass|
|4. Dividend Record||Dividend Payments for 10 years prior||Pass|
|5. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||Pass|
|6. Moderate PEmg Ratio||PEmg < 20||Pass|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||Pass|
|Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.|
|1. Sufficiently Strong Financial Condition||Current Ratio > 1.5||Pass|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||Fail|
|3. Earnings Stability||Positive EPS for 5 years prior||Pass|
|4. Dividend Record||Currently Pays Dividend||Pass|
|5. Earnings Growth||EPSmg greater than 5 years ago||Pass|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||6.07%|
|MG Value based on 3% Growth||$72.94|
|MG Value based on 0% Growth||$42.76|
|Market Implied Growth Rate||1.72%|
|% of Intrinsic Value||57.84%|
Dover Corporation qualifies for both the Defensive Investor and the Enterprising Investor. Both investor types are only initially concerned with the low current ratio. As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.
As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $3.58 in 2011 to an estimated $5.03 for 2015. This level of demonstrated earnings growth outpaces the market’s implied estimate of 1.72% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the 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 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.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$13.32|
|Number of Consecutive Years of Dividend Growth||20|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Total Current Assets||$2,737,125,000|
|Total Current Liabilities||$1,613,705,000|
|Shares Outstanding (Diluted Average)||160,398,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$5.24|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$5.03|
Other ModernGraham posts about the company
Other ModernGraham posts about related companies
Rationale & Outlook
After putting the company through a ModernGraham valuation, the next step is to look at the company to analyze its business. I like to utilize Warren Buffett’s business tenets, which are very helpful in determining the business’s strengths and weaknesses. Let’s put Dover Corporation through that analysis:
Is the business simple and understandable?
Dover Corporation’s business is very straightforward and understandable. The company is engaged in the manufacture of equipment that is used in a wide variety of industries. Specifically, the company focuses on four main segments: Energy, Engineered Systems, Fluids, and Refrigeration. In each of these areas, Dover strives to build equipment to meet customer needs in a safe and sustainable manner.
Buffett prefers to have companies with a simple business model because it is key for the investor to be able to know what the company is doing. There are some caveats to this in that it isn’t necessary for the investor to understand the details of how the product works, but rather the goal that the product achieves. Here, I do not know how to make machinery or understand how some of Dover’s pumps or sensors work, but I do understand the need for such products. As a result, I am able to understand Dover’s business in a simple manner.
Does the business have a consistent operating history?
Dover has been in operation since 1955, and throughout that time the company’s operations have remained consistent. The overall strategy of the company remains to “build the company by acquiring strong businesses with solid fundamentals and market leading positions” (as stated on the company website). This approach allows Dover to focus on growing its manufacturing into additional segments if the opportunity arises, but the company does seem to remain interested solely in the broader manufacturing arena.
In addition, the company has a long history of consistent dividends and dividend growth. In fact, Dover’s dividends have grown annually for at least the last twenty years from $0.28/share in 1995 to $1.60/share today. Dividend growth is a key element in a long-term investing strategy, as it can provide a solid yield on investment over a large period of time.
Does the company have favorable long-term prospects?
As mentioned, Dover’s business model is broken into four different segments, which together help to provide consistency and favorable long-term prospects. The company has done a great job at focusing on areas which will be needed long into the future and diversifying into areas that should smooth any business cycle.
The world will always need to draw from each of the four segments, and even if at times the need for equipment by one segment may lessen, some of the other segments are likely to pick up in need. For example, if there is a downturn in the economy, the need for refrigeration systems may drop as less people might eat at restaurants but the need for engineered systems may increase as those same people might hold onto their vehicles longer with additional servicing needs.
Is management rational?
Dover’s management has a clear strategy that is focused on long-term growth. As such, that management appears to be very rational in my opinion. In addition, the company has some Sustainability initiatives which is a key concept for management to address as the world increasingly turns to awareness of climate change. In particular, as millennials become decision makers, I predict that more companies will need to put more effort into environmentally friendly programs in order to attract business from leaders from the millennial generation and beyond.
Is management candid with shareholders?
Management candor is a key tenet, and the easiest way for management to be candid in today’s environment is to post informative statements on the company website, including links to earnings calls or transcripts of those calls. Dover’s investor information page is very easy to navigate and includes all of the information one would expect to see.
General Thoughts and Outlook
My position in Dover right now has been limited in that I have not added to the position for some time. I’ve held Dover for a few years now, and during my last valuation it was found to be fairly valued. Since the price has come down approximately 20% in the last few months, it now would appear to be undervalued again. As a result, it may be time to add to the position in general. I do like the company’s long-term approach to its management and especially like the consistent dividend growth. At the very least, I will be continuing to hold Dover at this time.
The author held a long position in Dover 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. This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions. ModernGraham is not affiliated with the company in any manner. Please also take a moment to read our full disclaimer.