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Donaldson (DCI) Posts Q1 Earnings Beat, Shares Up 10.8%

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Premium filtration products provider, Donaldson Company, Inc. (DCI - Free Report) reported adjusted earnings per share of 38 cents for first-quarter fiscal 2017, which beat the Zacks Consensus Estimate of 35 cents by 8.6%.

Investors cheered the strong beat, with Donaldson’s shares climbing 10.8% in the trading session following the release.

The bottom-line figure was even more impressive compared with the prior-year quarter tally of 45 cents, reflecting an increase of 11.8%.Earnings were driven by sturdy top-line growth, manufacturing efficiencies and streamlined operations.

Inside the Headlines

Donaldson reported total sales of $553 million, up 2.8% on a year-over-year basis. Also, revenues came ahead of the Zacks Consensus Estimate of $534 million. Strong performance in both the Industrial Products and Engine Products segments drove top-line growth. Moreover, currency fluctuations resulted in a 0.3% increase in the fiscal first-quarter sales.

Revenues at the Engine Products segment were up 2.1% year over year to $353.9 million.

The On Road sub-segment under Engine Products recorded a huge decline of 25.8%, which constrained the overall performance of the segment. However, both Aftermarket and Aerospace and Defense showed robust growth, increasing 6.7% and 4.2%, respectively. Further, demand in Off Road also looks stable.

Revenues at the Industrial Product segment fared even better, rising 4.1% year over year to $119.1 million.

Impressive performance of the Gas Turbines Systems, which rose a whopping 34.4% year over year, supported the segment’s revenues. Both Industrial Filtration Solutions and Special Applications business were marginally down.

Donaldson’s adjusted operating margin expanded 160 basis points (bps) year over year to 15.8%. In addition, the company’s Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) were $103.4 million as against $77 million recorded a year ago.

Liquidity & Cash Flow

Donaldson exited the quarter with cash and equivalents of $262.2 million as against $197.9 million as on Oct 31, 2015. The company had long-term debt of $324.7 million as on Oct 31, 2016, compared with $350.2 million as on Jul 31, 2016.

Share Repurchase Program/Dividends

During fiscal first quarter, the company returned $23 million to shareholders through share dividends. Additionally, Donaldson repurchased shares worth $41 million, which represents 0.8% of its outstanding shares.

DONALDSON CO Price and Consensus

2017 Guidance

Concurrent with the earnings release, the company reiterated its guidance for fiscal 2017. Donaldson projects fiscal 2017 adjusted earnings in the range of $1.50–$1.66 per share compared with the fiscal 2016 adjusted earnings of $1.52. Based on the current market scenario, the company expects full-year sales growth in between a 2% decline and a 2% increase from 2016.

In terms of segments, Donaldson estimates both Engine Products and Industrial Products sales to be a range of a 2% decline to a 2% increase compared with the prior year.

While solid aftermarket sales are likely to act as tailwind, poor sales of heavy-duty equipment (both off-road and on-road products) and commercial helicopters are anticipated to act as headwinds for Engine Products. For the Industrial Products segment, the company expects Industrial Filtration Solutions to act as growth catalyst, primarily driven by sales of replacement parts. However, the upside can be largely offset by sluggish Gas Turbine Systems and Special Applications businesses’ sales.

Conclusion

Donaldson’s financials remain vulnerable to mixed recovery signals in broader markets, leading the company to give cautious guidance for fiscal 2017. On the positive side, factors including focus on operational efficiency (like implementation of the global ERP system), robust replacement part sales, winning new first-fit programs and steady market expansion are expected to drive growth. Further, this quarter recorded stability in some of Donaldson’s businesses.

Factors such as decline in heavy-duty on-road transportation business, sluggish global agriculture, mining equipment and construction markets are anticipated to play spoilsport. Moreover, waning U.S. defense spending, softness in the commercial aerospace and major project deferrals are expected to worsen the company’s prospects. Further, recent exchange rate volatility remains a concern for the company.

On the positive side, Donaldson expects good prospects in the aftermarket business, despite tepid equipment utilization market. The company is optimistic about its innovative technology and past investments, particularly the recently acquired Partmo in South America, which is estimated to contribute $12–$13 million in fiscal 2017.

We believe that despite having sturdy growth prospects and a sound business structure, Donaldson remains vulnerable to macroeconomic and cyclical weaknesses, which limits its prospects for now.

Donaldson currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Some better-ranked stocks in the broader sector includeII-VI Incorporated , Applied Industrial Technologies Inc. (AIT - Free Report) and The Middleby Corporation (MIDD - Free Report) . While II-VI Incorporated sports a Zacks Rank #1 (Strong Buy), Applied Industrial and Middleby Corporation carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

II-VI Incorporated has registered a remarkable positive average surprise of over 39.8% in the four trailing quarters, driven by four strong consecutive beats.

Applied Industrial Technologies has managed to beat estimates twice in the trailing four quarters and has a positive earnings surprise of 4.9%.

Middleby Corporation beat earnings in each of the trailing four quarters, resulting in an average surprise of 15.9%.

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