Dover's Move Would Lessen Portfolio Cyclicality

On Tuesday, narrow-moat  Dover (DOV) announced that it is seeking strategic alternatives for a collection of upstream energy businesses that represent about three-fourths of the segment’s sales and EBITDA. Dover appears eager to lessen portfolio cyclicality, while taking advantage of the recent recovery in U.S.-based drilling activity to command a better price for this set of businesses. Year-to-date, sales growth and margin expansion in the energy segment began to reverse two long years of sharp declines. To illustrate, Dover’s energy segment ended 2016 with $1.1 billion in revenue and $187 million in EBITDA, as compared with $2 billion in revenue and $574 million of EBITDA in 2014 (when oil prices had surpassed $100 per barrel). In the first half of 2017, the energy segment reported year-over-year organic revenue growth of approximately 26.6%, while EBITDA margins have rebounded into the low 20s from the midteens in the first half of 2015.

The three wellsite businesses up for consideration--artificial lifts, automation, and diamond drill bits, represent the best of Dover’s energy segment. All enjoy leading positions and stand to produce even stronger cash flows as oil and gas sector recovery gains momentum. A range of exit strategies are under consideration, including a tax-free spin, outright sale, or merger, with a course of action likely selected by the end of 2017. We will not change our fair value estimate of $80 per share for Dover at this early stage; however, we estimate that the assets could command an attractive multiple of 12-14 times estimated 2018 EBITDA based on prior deals in the space.

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