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Will Donaldson (DCI) Stock Rally on Restructuring Efforts?

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Bloomington, MN-based filtration firm, Donaldson Company, Inc. (DCI - Free Report) has charted an impressive trajectory, with shares gaining 54.1% year to date, surpassing the Zacks-categorized Pollution Control Equipment & Services industry average of 47.2%.

Donaldson entered fiscal 2017 on a high note, with fiscal first-quarter top line and bottom line estimates comfortably beating the Zacks Consensus Estimate. While sturdy top-line growth, manufacturing efficiencies and streamlined operations fuelled earnings growth, the company’s revenues were driven by strong performance of both the Industrial Products and Engine Products.

These factors have propelled a bull run for the stock. Further, solid earnings estimate revisions in recent times signal that the stock could still have room to run. The Zacks Consensus Estimate for fiscal 2017 earnings has trended up in the past month, from $1.58 to $1.60, on the back of five upward estimate revisions versus no lower.

Factors Fueling Growth

Donaldson’s growth blueprint is devised on three pillars namely – expansion of core and aftermarket business, bolstering geographic footprint and using innovative technology – to secure first-fit program deals. The company enjoys a “win rate” of over 75% in Engine air and liquid market, which has significantly reinforced its core business. Such a sturdy win rate will likely help it in generating at least half a billion dollars in future revenues.

The recently opened distribution facilities in Colombia have significantly expanded the company’s industrial and engine filtration business in Latin America. Earlier this year, Donaldson acquired certain assets of Colombia-based replacement filter firm, Industrias Partmo, S.A. This transaction is expected to supplement Engine Products’ top line by $12–$13 million in fiscal 2017. Further, it opened a manufacturing facility in Poland, in a bid to fortify its position in the European market. This facility is proving conducive to the growth of the company’s liquid business.

Leveraging on its innovative technology, in fiscal 2016, Donaldson won more than 50 new engine liquid programs that will generate hundreds of millions of dollars in revenue over their respective 10-year life. Apart from these, improving operational efficiency through relentless efforts remains one of the main targets of Donaldson. Of late, the company has been undertaking restructuring initiatives to align operating and manufacturing cost structure with the current and projected customer and end market outlooks, to maximize growth opportunities.

The restructuring actions implemented by Donaldson over the last 12 months have boosted profitability. The company forecasts its operating margin in the range of 13.3%–13.9% compared with the adjusted operating margin of 13.2% in fiscal 2016, on the back of the above mentioned initiatives. Going forward, this Zacks Rank #2 (Buy) company expects to realize about $12 million of incremental restructuring benefits during fiscal 2017.

Key Picks

Other favorably placed stocks in the broader sector include II-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. 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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