Dover Corp. Stays Neutral

We reiterate our Neutral recommendation on Dover Corporation ( DOV - Analyst Report ) as it has downgraded its earnings guidance due to uncertain economic conditions in Europe, unfavorable foreign exchange rates and a slightly higher tax rate.

Dover reported its first-quarter 2012 earnings of $1.05 per share, outperforming the Zacks Consensus Estimate of $1.01. Results were 19% above the year-ago earnings of 88 cents per share. Total revenue improved 14% to $2.06 billion, beating the Zacks Consensus Estimate of $1.99 billion.

Dover’s expansion has been mainly driven by acquisitions and its acquisition pipeline is ever active. The company acquired the leading provider of artificial lift products and services for the oil and gas industry, Production Control Services, Inc.

Production Control Services, in its turn, will complement the Norris Production Solutions, an operating unit within Dover's Energy segment. Dover will be able to foray into the artificial lift market with a wider and diversified range of products. The company invested $220 million to acquire Production Control Services and diligently pursue its strategy to become the market leader in the field of artificial lift.

Dover has considerable exposure to the international market (41% of sales coming from outside of North America in 2011) and has been successful in winning new contracts in the overseas markets. Business activities ramped up in the emerging markets of the Middle East, Australia and Russia. The Energy segment has recently won a major contract which will significantly increase its market share in Australia.

Dover has downgraded its earnings guidance to a range of $4.70-$4.85 from the prior guidance of $4.80-$5.00. Compared with the prior fiscal year’s earnings of $4.26, Dover’s new guidance reflects annual growth of 10% to 14%, down from the previous expectation of 13% to 17%.

Furthermore, margins may face headwinds from restructuring activities in the next quarter as Dover expects to invest roughly around $5 million in these activities. The company’s investments in its restructurung programes are important as it is keen to capture the growing market opportunities.

Dover has access to the volatile semiconductor and electronics end-markets through its Printing and Identification segment. Lower volumes reduced operating leverage in the semiconductor business during the first-quarter 2012. As regards development, we do not expect anything noteworthy in the semiconductor sector in 2012 and thus remain cautious regarding the outlook for Printing and Identification.

Moreover, Dover faces tough competition from companies like Cooper Industries plc ( ) and Weatherford International Ltd. ( WFT - Analyst Report ) . Our recommendation on Dover is in line with a short-term Zacks #3 Rank (Hold).