Industrial conglomerate Dover cut its guidance — here's why the stock is rallying anyways

Published Thu, Apr 24 20253:28 PM EDT

Shares of Club name Dover climbed higher Thursday after the industrial conglomerate reported mixed first-quarter results. Although the company lowered its full-year outlook, the market quickly caught on to management's conservatism, allowing the stock to rally. Revenue in the first quarter dipped 1% year over year to $1.86 billion, slightly missing the $1.88 billion consensus, according to estimates compiled by LSEG. Adjusted earnings per share (EPS) in the three months ended March 31 totaled $2.05, outpacing expectations of $1.98 per share, LSEG data showed. The stock climbed nearly 2% in late afternoon trading Thursday. Shares are still down sharply from their highs earlier this year, as concerns about economic growth have weighed on cyclical corners of the market such as industrials. DOV YTD mountain Dover's year-to-date stock performance. Bottom line We were expecting a little more strength from Dover's results, but all things considered, we were pleased to see bookings remain in positive territory and margins expand nicely year over year. Initially, shares fell more than 3% — briefly trading below $160 apiece — in early trading, following a surprising cut to Dover's full-year outlook. But the stock quickly recovered those losses and climbed higher after the market got a better understanding of the drivers behind the lowered outlook. Importantly, the company did not take down its forecast based on conversations it has had with customers or anything they are seeing in the "data." Instead, CEO Richard Tobin described the trim as "purely a top-down mechanical adjustment" that was based on sentiment. "I basically said, let's clip off about 1% because we're probably going to have project drift because of all the delay that we've seen around these tariffs," Tobin said on the call. We do no fault Dover for prudently managing its forecast to hedge against a tariff-driven slowdown. It's an honest assessment of the unknown. By taking numbers down now, Dover's outlook will look a lot more resilient relative to others who have reaffirmed this earnings season. If the Trump administration does strike some trade deals and this wave of uncertainty passes, there will be upside to guidance. "If volume stays at what we thought it was going to be going into the year and we get price right, then clearly that's some upside," Tobin later added. Dover Why we own it : We own Dover as an industrial turnaround story with exposure to mega-themes, most notably the data center buildout to support artificial intelligence computing. The company's key products for data centers are thermal connectors and heat exchangers. Dover's business serving the biopharma industry is another attractive area. Dover's active portfolio management and commitment to capital returns sweeten the investment case. Competitors : Ingersoll Rand , IDEX Corp ., Snap-On , Veralto , among others Most recent buy: April 22, 2025 Initiated : May 28, 2024 Once the market got a better handle of what drove the guidance cut, Dover shares pared losses and moved higher on the day. This reversal was another good reminder of why it pays to listen to the earnings call before passing judgement. Dover also can drive upside this year by opportunistically deploying capital. The company ended the first quarter with $2.8 billion of dry powder — $1.5 billion in excess cash and another $1.3 billion of debt it can take on and still maintain a 2.5 target leverage ratio. Management's preferred use of cash is pursuing more value-creating deals of faster-growing, high-margin businesses. We think another option on the table is accelerated share repurchase. We're reiterating our buy-equivalent 1 rating, but reducing our price target to $210 a share from $230 to account for the guidance trim and lower price-to-earnings multiples being paid across the market. We'll hear more from the Tobin later Thursday when Jim Cramer interviews the CEO on "Mad Money." Quarterly commentary Both organic sales growth and bookings increased by half a percentage point, which was a modest disappointment against higher expectations. However, we were pleased to see positive year-over-year bookings for the sixth quarter in a row with every segment reporting a book-to-bill ratio above 1, which indicates its backlog is growing. This puts the company in good position to deliver in the second quarter. "We feel really good about Q2 because of the backlog," Tobin said. Organic bookings is defined as total orders received from customers in the reported period, excluding the impact of foreign-exchange rates and divestitures and acquisitions. Book-to-bill measures the amount of orders received versus orders fulfilled, so above 1 is desired. Segment profitability also stood out, with year-over-year margin gains in four of the five segments. Now, here's a look at how each business segment did in the quarter (a basis point is equal to 0.01 percentage point): Dover's engineered products segment— a diverse collection of businesses serving end markets such as vehicle repair, aerospace and defense, and industrial automation — saw an 8% decline in organic sales and a 100 basis point contraction in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin. The business saw lower volumes in vehicle services and shipment timing in aerospace and defense, while fluid dispensing showed growth. Margins dipped off the lower volumes. Clean energy and fueling segment — consisting of products used in transporting and dispensing various fuels including gasoline and compressed natural gas, among others — delivered 2% organic revenue growth on an annual basis and margins expanded 180 basis points. The organic revenue growth was driven by strong shipments and orders in clean energy components, fluid transport, and below ground retail fueling equipment. Margins improved thanks to a favorable mix of product sales, productivity, and restructuring. Imaging and identification — where we find precision marking and coding, product traceability, brand protection and digital textile printing equipment, along with related consumables, software and services — saw 4% organic revenue growth and a 260 basis point improvement in margins. The higher sales were driven by growth in serialization software and in core marking and coding. The margin gains were driven by productivity and ongoing structural cost controls. Pumps and process solutions — home to Dover's biopharma components business, akin to that of fellow Club holding Danaher , and its thermal connectors for AI servers — recorded organic revenue growth of 7%. Here the company saw robust shipments and order rates for single-use biopharma components and triple-digit growth in thermal connector sales. Both of these business lines are high margin, explaining the segment's strong, 130 basis point improvement in profitability. Precision components and industrial pumps sales were also up solidly, but polymer processing shipments remained a drag. Climate and sustainability technologies — which provides energy-efficient equipment, components and parts for the commercial refrigeration, heating and cooling and canmaking equipment end-markets — saw organic revenue decline 4% but margins improve 120 basis points. Dragging the segment lower were heat pump headwinds in Europe and lower volumes in food retail. CO2 systems in the United States and global heat exchangers (ex-Europe) were a bright spot. Margins increased thanks to productivity and higher mix of U.S. CO2 systems. Dover continues to expect that 20% of its portfolio will grow double digits in aggregate this year. Guidance and tariffs Dover made a few wise adjustments to its full-year outlook. It now expects organic revenue growth of 2% to 4%, down from its prior expectation of 3% to 5% growth. Accordingly, the company lowered its adjusted earnings per share forecast by 10 cents at the low and high end to the range of $9.20 to $9.40, which at a midpoint of $9.30 is below the consensus estimate of $9.34. As for the impact of tariffs, management quantified an incremental annualized tariff headwind of $215 million, with about $175 million tied to China. The good news is that these figures are before any cost mitigation, targeted pricing, or strategic share gains, which management sounded very upbeat about due to its local manufacturing footprint. Additionally, Dover is already actively reshoring a product line in China that makes up about one third of the region-specific incremental cost headwind. (Jim Cramer's Charitable Trust is long *** FILL IN*** . See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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Dover Corp.'s Steam-Thru SIP connectors in use in a biopharmaceutical setting.

Courtesy: Dover Corp.