Streetwise
Lauren Rudd
Sunday, April 11,
2010
Insulate Yourself From the Antics of Wall Street
Two years ago Wall Street managed to trigger a devastating
wave of foreclosures, paralyze substantial portions of the capital markets and
create the worst financial crisis since the Great Depression. A congressional
panel recently pointed a finger of responsibility at former Federal Reserve
Chairman Alan Greenspan, taking him to task for failing to recognize and prevent
the crisis. In what was a major personal reversal of position, Greenspan
responded by saying, "Did we make mistakes? Of course we made mistakes...”
Yet, there appears to be no limit to the arrogance of those
on the Street. For example, in its recent letter to shareholders, Goldman Sachs
is now rebutting allegations it unduly benefited from government assistance and
rebuking accusations that it bet against its own clients during the crisis.
However, Goldman’s actions should come as no surprise. The
financial markets have always been driven by greed, with the wealthiest often
being the greediest. This is not a sudden epiphany; it has been so throughout
history. Technology and time have merely changed the game’s parameters.
The insatiable desire for wealth is an inherent trait of the
human race. Moreover, the most recent crisis was merely an illustration of the
degree to which the Street is able to extend its tentacles of influence and
destruction when unfettered by the fences of regulation. Unless Congress
reinstitutes and oversees an improved regulatory environment, it will only be a
matter of time before we are invited to see a new act of the same play.
However, the Street’s antics should not be an impediment to
your investment strategy. And you should avoid being distracted by those who
sermonize on the idea of economic Armageddon. Instead, direct your efforts
towards locating investment opportunities that will enhance your wealth and
immunize your portfolio against the Street’s transient activities. In other
words, now is time to belly up the bar and take responsibility for your
financial future.
For example, you might want to consider the Dover
Corporation. When I last wrote about the company a year ago, my earnings
forecast for 2009 was $2.79 per share with a 12-month target price on the shares
of $28.50. Earnings from continuing operations came in at $1.99 per share. There
is no question that the recession hurt earnings more than I had anticipated.
Nonetheless, it is the share price that was the real surprise as the shares
recently closed at $47.34.
Looking back, the company had two goals at the start of 2009;
to maintain a double-digit operating margin and to generate free cash flow in
excess of 10 percent of revenue. It exceeded both goals. Full year operating
margin was 12.3 percent and free cash flow was 11.8 percent of revenue.
In its guidance for 2010, Dover is projecting revenue growth
of 7 to 9 percent, representing organic growth of 4 to 6 percent and 3 percent
from acquisitions completed in 2009. Based on this revenue expectation, the
company’s full-year earnings guidance is between $2.35 and $2.65 per share. The
current P/E multiple of 25 would result in a share price of between $58 and $66
per share.
A discounted earnings model yields an intrinsic value of $51
per share, while the more conservative free cash flow to the firm model suggests
an intrinsic value of $48 per share. Regular readers know that as a general rule
intrinsic values that are so close to the current share price would rule out the
shares for further consideration. However, my earnings estimate for FY 2010 is
$2.55 per share, and $3.25 for FY 2011, representing an earnings growth rate of
about 27 percent. Therefore, I am willing to break a few eggs in order to make
an omelet.
My 12-month target price on the shares is $53, for a gain of about 12 percent,
derived in part from my projected earnings growth rate. In addition, there is
currently a 2.2 percent dividend yield. Oh, and by the way, Dover has been
increasing its dividend for 53 years.
