Tickers in this Article: DOV, EMR, GE, HAL, DHR, ITW, SI, MIDD, CVX
There have been plenty of industrial companies that have sold off on fears that the sluggish economy in the U.S. and the ongoing banking trouble in Europe is going to start biting into orders. With Dover (NYSE:DOV), it's a little worse as fears of what may happen in industrial markets are coupled with the realities of tougher markets in areas like semiconductors and solar. Even allowing that order growth is slowing a bit and margins may have peaked, Dover's stock price seems to understate the potential of this company.

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Good and Bad In Q3
Like other industrial conglomerates, third quarter earnings at Dover were a mix of good and bad news. Overall, revenue rose an eye-popping 22%, but acquisitions made a significant contribution (9%). Organic growth was a more modest 10%. Revenue growth at Dover was pretty binary for Dover - there were two high-growth businesses (fluid management and industrial products) and two low-growth businesses (engineered systems and electronic technologies).

Profit performance was mixed. Gross margin fell a full point, as reported, though there was slightly less erosion on an adjusted basis. Operating margin also fell a point, though operating income did grow 15%. Margin performance in the business units was actually generally positive, but a big decline in the electronic technologies business was a definite drag on the overall business.

Fluid Management Looking Like a Star
These are heady times in Dover's fluid management business, as revenue growth is excellent (23% on an organic basis) and margins are exceptional (nearly 25%). Dover isn't the only one seeing good times in this industry, of course. Dover, Emerson (NYSE:EMR), Flowserve (NYSE:FLS), General Electric (NYSE:GE) and Siemens (NYSE:SI) are all seeing improving demand out there as energy producers, refiners and pipeline companies all invest in capital expansion.

Given the exceptional pace of drilling activity and the optimism (even if it tepid optimism) from service companies like Halliburton (NYSE:HAL), it does not sound like production activity is going to slow down any time soon. Likewise, major exploration and production companies like Chevron (NYSE:CVX) have major offshore platform projects underway and on the books - projects that will demand more fluid management equipment.

Will the Laggards Rebound?
Engineered solutions was not especially strong for Dover this quarter, though the 11% growth in product ID should be incrementally encouraging for a company like Danaher (NYSE:DHR). Other markets, though, like food service equipment seems to be more challenged. Perhaps that's not surprising with more and more restaurants going under and fairly weak traffic overall, but it's not good news for companies like Illinois Tool Works (NYSE:ITW), Dover or Middleby (Nasdaq:MIDD) in general.

In the electronic technologies segment, it's a question of timing. The semiconductor market is rough right now, and solar is pretty ugly as well. Longer term, it seems foolish to argue that there won't be a rebound and many years of eventual market expansion, but the "when" is very much up in the air. In the meantime, analysts will fret about revenue growth and the negative operating leverage that could come from this unit if there's a sustained tech slowdown.

The Bottom Line
Dover is a stock that tests investor patience and time horizons. It's not an especially dynamic name today, even if the correction seems overdone and prime for a rebound. From a longer-term perspective, though, it's an appealing company. The company's core businesses are appealing, the return on capital is okay (though should be better), and Dover should have the means to do further deals if it wants to do so.

All in all, this stock looks to be more than 30% undervalued, if the company can deliver mid-single-digit revenue growth and maintain its free cash flow margin. That is not a bad bargain considering the overall growth prospects of this conglomerate. (For additional reading, take a look at Peer Comparison Uncovers Undervalued Stocks.)

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