A month has gone by since the last earnings report for Donaldson (DCI Quick QuoteDCI - Free Report) . Shares have lost about 3.9% in that time frame, outperforming 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 Q4 Earnings Match Estimates, Revenues Beat

Donaldson Company, Inc.’s fourth-quarter fiscal 2022 (ended Jul 31, 2022) earnings matched the Zacks Consensus Estimate of 84 cents, while sales surpassed the same by 1.3%.

The bottom line improved 27.3% 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 fourth quarter, Donaldson’s net sales were $890 million, reflecting year-over-year growth of 15.1%. The top line surpassed the Zacks Consensus Estimate of $879 million.

Regionwise, DCI’s net sales in the United States/Canada increased 32.2% year over year. The top line expanded 14.8% in Europe, the Middle East and Africa, 34.9% in Latin America and 8.4% in the Asia Pacific.

Donaldson 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 69.7% of net sales in fourth-quarter fiscal 2022) sales were $620.3 million, reflecting year-over-year growth of 17.5%.

The results were positively impacted by 20.5% growth in Off-Road, 20.7% in Aerospace and Defense, 17.7% in Aftermarket sales and 4.6% in On-Road.

Revenues generated from Industrial Products (accounting for 30.3% of net sales in fourth-quarter fiscal 2022) were $269.7 million, increasing 10.1% from the year-ago quarter’s figure.

Results benefited from sales growth of 13.5% in Industrial Filtration Solutions and 38.5% in Gas Turbine Systems. However, sales declined 16.6% in Special Applications.

Margin Profile

In the fiscal fourth quarter, Donaldson’s cost of sales increased 17.9% year over year to $598.4 million. Gross profit jumped 9.8% to $291.6 million, while gross margin declined 160 basis points (bps) to 32.8%. The margin results were negatively impacted by higher raw material costs, partially offset by favorable pricing.

Operating expenses increased 5.6% year over year to $162.3 million. Operating profit in the quarter under review increased 15.4% to $129.3 million. Operating margin was 14.5%, flat year over year.

Effective tax rate in the quarter was 21.4% compared with 26% in the year-ago quarter.

Balance Sheet & Cash Flow

While exiting fourth-quarter fiscal 2022, Donaldson’s cash and cash equivalents were $193.3 million, down 13.2% from $222.8 million recorded in the last fiscal year’s comparable quarter. Long-term debt was up 39.8% year over year to $644.3 million.

In fiscal 2022, Donaldson repaid the long-term debt of $90 million.

In fiscal 2022, DCI generated net cash of $252.8 million from operating activities, reflecting a decrease of 37.1% from the year-ago figure. Capital expenditure (net) totaled $85.2 million compared with $58.3 million in the year-ago fiscal period. Free cash flow decreased 51.2% to $167.7 million.

In fiscal 2022, DCI used $170.6 million to repurchase shares and $110.1 million to pay out dividends.

Outlook

For fiscal 2023 (ending July 2022), Donaldson expects earnings per share of $2.91-$3.07 compared with 2022 GAAP and adjusted EPS of $2.66 and $2.68, respectively. Sales are anticipated to increase 1-5% from the fiscal 2022 level. Positive pricing is anticipated to leave an accretive impact of 6%. However, movements in foreign currencies are expected to negatively impact sales by 4%.

On a segmental basis, Engine Products sales are anticipated to increase 0-4% from the fiscal 2022 level. The segment’s performance is likely to benefit from mid-single digit growth in Aftermarket and Aerospace sales. Also, solid growth in Defense sales is anticipated to offset low-single digits declines in On-Road and Off-Road sales.

Sales growth for Industrial Products is anticipated to be 3-7% compared with the fiscal 2022 figure. The segment is likely to gain from high-single-digit growth in Industrial Filtration Solutions. Gas Turbine Systems sales are projected to be up low-single digits, while Special Applications sales are anticipated to be flat with the prior-year period’s figure.

Operating margin is expected to be 14.5-15.4% for fiscal 2023, suggesting an increase from the reported and adjusted operating margin of 13.4% and 13.5%, respectively, in fiscal 2022. Interest expenses are predicted to be $14.5-$15 million. Other income is likely to be approximately $17 million. Effective tax rate is anticipated to be 25-27%.

Capital expenditure for the fiscal year is expected to be $115-$135 million. Free cash flow conversion is anticipated to be 110-125%. Share buybacks are expected to account for 2% of outstanding shares.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

VGM Scores

Currently, Donaldson has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward 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.