On May 23, 2013, Dover Corp (NYSE:DOV) publicized a board approval regarding the spin-off of its consumer goods production into a new publicly traded company called Knowles. The new public venture will be taking over production of auditory consumer goods such as speakers, microphones, and transducers. The new production unit will also engage in broad communication infrastructure modules.
Dover Corp (NYSE:DOV) is basically involved in designing and manufacturing various aspects in the communications, life sciences, aerospace/industrial, and defense industry.
Incorporated just after the World War II, in 1947, Dover Corp (NYSE:DOV) has dedicated itself in manufacturing a broad spectrum of products and peripherals in four distinct divisions: Telecommunication Technologies, various Energy ecosystems, Engineered Systems, and Printing & Documentation regarding identification.
The spin-off plan
Dover Corp (NYSE:DOV)’s CEO, Mr. Robert Livingston, reportedly told Reuters on May 23 that the new company will be taking over most of its consumer electronics operations. On the other hand, the parent company (Dover) will re-focus on its core business in the industrial segment including energy, fluids, and refrigeration.
The new company will be operating under few existing consumer product brands comprising Sound Solutions, Dielectric, Novacap, Syfer, and Vectron under Knowles. Actually, Knowles was an independent company which specialized in acoustic products before Dover Corp (NYSE:DOV) acquired it back in 2005 for $750 million to expand its existing consumer product operations in a “brownfield” effort.
Market reaction
Since the news of this spin-off proposition broke, Dover’s stock price jumped more than 5% in a single day. With a P/E ratio of 16.75, which is relatively low compared to industry the P/E ratio of 24.22, Dover clearly has some room to run.
Impact on competitors
Dover’s main competitors in the industrial segment are Ingersoll-Rand PLC (NYSE:IR) and Weatherford International Ltd (NYSE:WFT).
Ingersoll-Rand PLC (NYSE:IR), a relatively new company, is a well differentiated, comprehensive company and a direct competitor of Dover’s core competence, the Industrial segment. Its Industrial Technologies division caters to a range of products such as compressed air systems required for refrigeration, fluid handling systems, etc. Currently, Ingersoll-Rand’s P/E ratio stands at 17.54, which indicates further growth potential when compared to the industry P/E ratio of 24.22.
Also, its dividend yield is 1.46%, which is higher than industry average of 1.28%. Ingersoll’s stock price went down due to the prospect of tougher competition from Dover’s renewed focus on the industrial segment.
Weatherford International Ltd (NYSE:WFT)’s share price also went down from $14.30 on May 22 to $13.89 on May 24, in anticipation of a similar impact. Weatherford has been competing with Dover since its incorporation in 1972 as a provider of equipment and services. It competes with Dover in the energy sector by providing drilling, evaluation, completion, and production of oil and natural gas wells.
Its current earning per share is in the negative. However, as the energy sector has been bullish of late, the prospect of future earnings potential for Weatherford is significant. Dover’s energy section will also likely to benefit from similar bullish trend in the Brent & Crude Oil.
From a competitive vantage point of both industrial and energy segments, it can be concluded that Dover’s spin-off plans would provide the company certain competitive advantage. Mr. Christopher Bamman, an analyst from Ascendiant Capital Markets, made it clear when he mentioned that the communication technologies operation of Dover was “not aligned” with its industrial profile.
