Streetwise
Lauren Rudd
Sunday, April 5,
2009
Contrarian Once Again
“Two things are infinite: the universe and human
stupidity; and I am not sure about the universe.” Albert Einstein
My forecast of a recession back in February, 2007 was
pre-empted by more notable names with an opposite stance. The good news is that
once again I find myself taking a contrarian position to a veritable din of
doomsday commentary. Often based on weak or nonexistent economic precepts, the
proponents of impending disaster alarm the populace needlessly as they replicate
Chicken Little’s playbook.
The Fed’s Term Asset-Backed Securities Loan Facility (TALF),
designed to jolt the comatose securitization markets back to life, combined with
the $700 billion Troubled Assets Relief Program (TARP), and the $787 billion
spending and tax cut bill, supports the thesis that we will see a light at the
end of the tunnel by first quarter 2010...and this time it will not be an
oncoming freight train.
As the various stimulus programs gain traction they will
neutralize the devastating impact of credit default swaps and the subprime
mortgage fiasco. Nonetheless, the housing industry will likely remain in
intensive care for some time, although there are signs of life. The same is true
for the domestic automobile industry where sheer size simply means the medicine
is stronger and less palatable.
The only really bad news is that unemployment hit a
25-year-high of 8.1 percent in February and it will continue to rise through the
end of this year, thereby slowing the recovery process. Meanwhile, if talk of
uncontrollable inflation is giving you heartburn, relax. It is unlikely to
happen.
Yet, as we suffer through the current economic conundrum,
there is an outflow of deprecating comments designed to inflame and subsequently
hinder efforts to effectively deal with the recession. One Congresswoman
advocates overthrowing the current administration by force, while a major
network commentator implies that, “FEMA was setting up concentration camps.”
Einstein had it right, human stupidity is boundless.
Therefore, ignore the rhetoric and concentrate your efforts
over the next several months on taking advantage of the greatest investment
bargains to be found on Wall Street in your lifetime.
For example, one company that merits consideration is the
Dover Corporation (DOV), a company best described as a $7 billion global
portfolio of manufacturing companies. As such, it provides a veritable
Cornucopia of specialty systems and support services for a variety of
applications in the industrial marketplace.
Although not recession proof, Dover has nevertheless managed
to raise its dividend for 53 consecutive years, the fourth longest record on the
NYSE and its dividend payout is only 30.45 percent of earnings.
Revenue from continuing operations for fiscal year 2008 ended
December 31, was $7.57 billion, up 3 percent over the prior year. Those earnings
were the result of one percent organic growth, one percent net acquisition
growth and one percent from foreign exchange.
Earnings from continuing operations in 2008 were $694.8
million or $3.67 per share, as compared to $669.8 million or $3.30 the prior
year. That represents an increase of 4 percent and 11 percent respectively.
Full-year free cash flow was $835 million, or 11.0 percent of revenue.
The intrinsic value of the shares, using a discounted
earnings model with a 13.75 earnings growth rate and a 10 percent discount rate,
is $128. The more conservative free cash flow to the firm model produced an
intrinsic value of $126.
My earnings estimate for the 2009 fiscal year is $2.79 per share with a 12-month
target price on the shares of $28.50, as compared to the current share price of
$26.36, for a gain of 8 percent. There is also a 4 percent indicated dividend
yield. Dover is scheduled to release its first quarter 2009 earnings on April
22.
