A month has gone by since the last earnings report for Donaldson (DCI Quick QuoteDCI - Free Report) . Shares have lost about 10.2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Donaldson due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Donaldson Q3 Earnings Miss Estimates, Revenues Beat

Donaldson Company, Inc.’s third-quarter fiscal 2022 (ended Apr 30, 2022) earnings missed the Zacks Consensus Estimate by 6.9% while sales surpassed the same by 2.7%.

Its shares gained 5.2% yesterday to eventually close the trading session at $53.63.

The company’s earnings in the reported quarter were 67 cents per share, lagging the Zacks Consensus Estimate of 72 cents. The bottom line improved 1.5% from the year-ago quarter’s 66 cents. Sales growth in the reported quarter was partially offset by the headwinds stemming from supply-chain constraints and higher cost of raw materials.

Revenue Results

In the fiscal third quarter, Donaldson’s net sales were $853.2 million, reflecting year-over-year growth of 11.5%. The top line surpassed the Zacks Consensus Estimate of $831 million.

Region-wise, the company’s net sales in the United States/Canada increased 18.4% year over year. The top line expanded by 7.8% in Europe, the Middle East and Africa, and by 33.7% in Latin America. It declined 4.4% in Asia Pacific.

The company reports revenues under the following segments — Engine Products and Industrial Products. A brief snapshot of the segmental sales is provided below:

Engine Products’ (accounting for 70.4% of net sales in third-quarter fiscal 2022) sales were $601 million, reflecting year-over-year growth of 13.2%.

The results were positively impacted by 13% growth in Off-Road, 29.2% in Aerospace and Defense, and 14.5% in Aftermarket sales. However, sales declined 9% in On-Road.

Revenues generated from Industrial Products (accounting for 29.6% of net sales in third-quarter fiscal 2022) were $252.2 million, increasing 7.8% from the year-ago quarter.

Results benefited from sales growth of 9.1% in Industrial Filtration Solutions and 19.4% in Gas Turbine Systems. However, sales declined 3.6% in Special Applications.

Margin Profile

In the quarter, Donaldson’s cost of sales increased 15.2% year over year to $584.2 million. Gross profit jumped 4.3% to $269 million while gross margin declined 220 basis points (bps) to 31.5%. The margin results were negatively impacted by higher raw material costs, partially offset by volume growth and favorable pricing.

Operating expenses increased 6.3% year over year to $158 million. Operating profit in the quarter under review increased 1.5% to $111 million. Operating margin was 13%, down 130 bps year over year.

Effective tax rate in the quarter was 25.4% compared with 23.9% in the year-ago quarter.

Balance Sheet & Cash Flow

Exiting third-quarter fiscal 2022, Donaldson’s cash and cash equivalents were $168.7 million, down 1% from $170.4 million recorded in the last-reported quarter. Long-term debt was up 9.6% sequentially to $607.2 million.

In the first nine months of fiscal 2022, the company repaid the long-term debt of $90 million.

In the reported quarter, it generated net cash of $64.2 million from operating activities, reflecting a decrease of 37.9% from the year-ago figure. Capital expenditure (net) totaled $23.2 million compared with $9.8 million in the year-ago quarter. Free cash flow decreased 56.1% to $41 million.

In the first nine months of fiscal 2022, the company used $153.7 million for repurchasing shares and $81.8 million for paying out dividends.

Outlook

For fiscal 2022 (ending July 2022), Donaldson anticipates benefiting from solid demand for its products. However, supply-chain challenges weigh on the company.

It expects earnings per share of $2.67-$2.73 compared with $2.66-$2.76 predicted earlier. Sales are anticipated to increase 14.5-16.5% year over year compared with 11-15% guided previously. Movements in foreign currencies are expected to have a negative impact of 3% on sales.

On a segmental basis, Engine Products sales are anticipated to increase 16-18% year over year. The segment’s performance is likely to benefit from growth in Off-Road and Aftermarket sales. Also, solid growth in Aerospace and Defense sales is anticipated. However, supply chain issues might hurt On-Road sales.

Sales growth for Industrial Products is anticipated to be 10-12% year over year. The segment is likely to gain from solid momentum in Industrial Filtration Solutions, Gas Turbine Systems and Special Applications.

Operating margin is expected to be 13.5-13.9% for fiscal 2022. Interest expenses are predicted to be $14.5-$15 million. Other income is likely to be $10-$12 million. Effective tax rate is anticipated to be 24-26%.

Capital expenditure for the fiscal year is expected to be $90-$110 million. Free cash flow conversion is anticipated to be 50-60%. Share buybacks are expected to account for 2-2.5% of outstanding shares.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision.

The consensus estimate has shifted 5.5% due to these changes.

VGM Scores

At this time, Donaldson has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Donaldson has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.