Dover Corp. Should Be Glad It Said Goodbye to Energy

(Bloomberg Businessweek) -- There’s never been a better time to not be in the energy business.

With the coronavirus pandemic crippling demand and a dearth of storage capacity complicating the technicalities of trading contracts, the price of crude oil crashed into negative territory for the first time on April 20. But when industrial conglomerate Dover Corp. held its earnings call the next day, executives barely touched on the subject. That’s because Dover—a $13 billion company that makes gas station pumps, bar code printers, and refrigerated displays for grocery stores, among other things—spun off its Apergy Corp. energy business in May 2018.

It’s a case of spectacularly good, if somewhat accidental, timing. Former Dover Chief Executive Officer Bob Livingston had actually expressed concern in 2017 about divesting the energy assets too early, lest he deprive shareholders of the benefits of a recovery from the oil price rout in 2015 and 2016. But with some encouragement from activist investor Third Point LLC, he moved ahead anyway, making this a success story for the push to streamline industrial conglomerates and steer them away from more volatile businesses. Since the split, shares of Dover are up about 20%, more than triple the gains of the S&P 500 index, while those of Apergy are down about 80%.

Dover isn’t immune to the pandemic. Shuttered restaurants are unlikely to spring for its food-service equipment anytime soon, and fashion retailers are going to spend less on its digital-textile-printing products. And Dover does still sell pumps to the energy sector. With all the uncertainty, it withdrew its earnings guidance for the year. But the company is clearly in a much better position than it would have been without the breakup, says Melius Research LLC analyst Scott Davis. Earnings per share declined more than 30% from peak to trough during the last oil price slump. In contrast, while analysts have been aggressively cutting their earnings estimates for Dover, they’re modeling a decline on average of only about 7% in 2020.

This kind of resilience in the face of market swings is precisely why industrial conglomerates have spent much of the past five years spinning off and selling assets. Some companies have moved more slowly: Emerson Electric Co. still has outsize exposure to the energy sector and a weird amalgamation of businesses ranging from automation equipment to garbage disposals. Eaton Corp. has yet to divest its volatile vehicle unit despite analysts’ calls for it to do so. General Electric Co. is stuck with a 37% stake in oilfield-services company Baker Hughes Co. that’s dropped sharply in value.

Dover’s ability to weather the crisis will send a message to those still sitting on volatile businesses, energy-related and otherwise: It’s better to get out while you can.
 
Sutherland is a columnist covering deals and industrial companies for Bloomberg Opinion.

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