Should You Buy It? Take the Over on Dover

At Wednesday's closing price of $44.34, Dover ( DOV) shares are down more than 10% after the company delivered better-than-expected third-quarter results Oct. 24.

At current levels, the stock is valued at just 12.3 times expected 2008 earnings of $3.62 a share. This is a 33% discount to the company's historical average valuation, and a 12% discount to the benchmark S&P 500.

Given all these positives, should you buy shares in Dover, or will the stock continue to lag the overall market?

Dover is a conglomerate of more than 40 companies aligned across four divisions. The company's businesses address supply end markets, including technology, energy and machinery. Dover makes everything from printers and circuit boards to aerospace parts, truck winches and drill bits for oil and natural gas exploration.

The industrial manufacturer earned 88 cents a share in the most recent quarter, which was a penny ahead of the consensus analyst estimate. Revenue also grew 15% from the previous year to $1.84 billion, which also came in $10 million higher than expected.

Dover has made a dozen acquisitions over the past year, but organic revenue still grew 3% year over year last quarter, including an impressive 6% in its nontechnology divisions. The company is also a beneficiary of the weaker dollar, generating more than 40% of its revenue outside of the U.S.

It's also worth noting that Peter Francis of the board of directors has begun buying Dover shares on the open market. According to Securities and Exchange Commission filings, Francis has spent about $200,000 recently to purchase 4,400 shares. Additionally, the company announced a 10 million-share stock-buyback program (5% of the company's shares) in August.

Now, management will have to cut back on its $350 million annual acquisition strategy to execute the buyback, but I believe that's a prudent shift given the current share price. The next update on this front will likely come at Dover's annual investor meeting Friday.

In addition to the support of insider purchases and the company's repurchase program, the stock also sports an attractive 1.8% dividend yield. Management can cover the 20-cent quarterly dividend four times over with expected 2007 earnings of $3.19 a share. Dover's free cash flow is consistently above reported net income, and the company also has an A-rated balance sheet, with a debt-to-capitalization ratio of less than 25%.

Between Dover's earnings momentum and discount valuation, I believe the stock will find a bottom in the near term. Supported by the company's share-repurchase program and the recent insider buying, I believe the shares are more likely to see the mid-$50s over the coming quarters than $40.

David Peltier is a research associate at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback; click here to send him an email.

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