NEW YORK (
) -- Whether too high or too low, the Street gets more than its share of criticism for how it prices certain stocks. But when looking at shares of industrial conglomerate
, which are up 40% since April, I believe analysts deserve some credit for what I once regarded as misguided optimism.
Given Dover's breadth of end-market exposure, which includes smartphones, commercial refrigerators, gas pumps and so on, I wasn't especially high on the company following its sluggish April quarter. I say "sluggish" here even though I know full well the company posted inline results. But when compared to, say,
, which is equally well-diversified, I've never been impressed with Dover's organic growth. Not to mention, the stock has always been -- in my opinion -- expensive.
Even so, the company's management -- which, in fairness, has posted solid book-to-bill performance -- always remained optimistic, promising a strong second-half recovery. The Street, meanwhile, having always been in love with the stock, didn't need much convincing. Since the April conference call, shares of Dover, which (then) traded around $67 per share, are now resting near their 52-week high at around $93. While these shares may not be in the bargain bin today, following a strong third quarter $100 per share is a given.
Dover's management, which I have to now regard as highly underrated, had advised investors earlier in the year that it would be the drilling business and improvements in refrigeration that would lead the second-half recovery. With revenue advancing 7% year-over-year to $2.3 billion, management was right on target -- growth was led primarily by drilling and downstream markets within energy business.
Refrigeration/food equipment markets were also strong. Given the frequency with which Dover does deals, it was especially encouraging that Dover posted 3% organic growth, which continues to outperformed rivals including
. In this sector, there is nothing that analysts love to scrutinize more.
Organic growth, which measures a company's operational performance using only internal resources and excluding events like acquisitions, is an important metric used to gauge performances of companies that are so well diversified. It's rare that companies like Dover can enter so many markets without going the merger and acquisitions route.
While there's nothing wrong with that, one acquisition (or two) can add an immediate boosts to the acquirer's revenue performance -- making management appear way more competent than it really is. In the case of Dover, the fact broadly every business segment grew on an organic basis suggests management is doing well executing on its global growth strategies and productivity initiatives.
From that standpoint of cost-cutting and fiscal awareness, the company was able to deliver almost 20% in segment margins, which represents a year-over-year improvement of 100 basis points. But I don't believe Dover's management has any true peers from an operational perspective. I say this with all due respect to the great work that is going on at both GE and Danaher.
I do realize that it sounds like I'm raising the pompoms a little bit for Dover. But I'm not going to pretend I deserve any credit for this performance. Truth be told, I'm surprised by these results. As I said, I expected very little from this company following the April quarter. Well, I've been proven wrong.
The Street, on the other hand, is being rewarded for its optimism and faith in the company's management. The question now is, where is the stock heading next?
While I do believe Dover's stock is not cheap, the organic growth results makes me question why the Street prices Danaher at a P/E that is four points higher than Dover. I take that as a tell-tale sign these shares are still being discounted, albeit slightly.
With the recent completion of the Finder Pompe deal, there is clearly more value to be had from the standpoint of revenue and cash-flow growth. At the very least, this points to a fair-market value of at least $100 per share. It's not exceptional upside, but the downside is very limited while collecting a decent yield at 1.60%.
At the time of publication, the author held no position in any of the stocks mentioned
This article was written by an independent contributor, separate from TheStreet's regular news coverage.