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Why Is Donaldson (DCI) Down 16.1% Since Last Earnings Report?

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A month has gone by since the last earnings report for Donaldson (DCI - Free Report) . Shares have lost about 16.1% 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 catalysts.

Donaldson Misses on Q1 Earnings, Tweaks EPS View

Donaldson reported mixed first-quarter fiscal 2019 (ended Oct 31, 2018) results, with earnings lagging the Zacks Consensus Estimate but revenues beating the same.

Earnings & Revenues

Quarterly adjusted earnings came in at 56 cents per share, up 21.7% year over year. However, the bottom line missed the Zacks Consensus Estimate by a penny.

The company generated revenues of $701.4 million in the reported quarter, up 8.8% from the year-ago level. However, the top line marginally surpassed the Zacks Consensus Estimate of 700 million.

Segmental Break-Up

Quarterly revenues from the Engine Products segment came in at $480.9 million, up 8.8% year over year. Industrial Products segment's revenues also improved 8.8% year over year to $220.5 million.

Costs & Margins

Cost of sales in the reported quarter was $463 million, up 10.1% from the year-ago quarter. Adjusted gross margin came in at 34%, down 80 basis points (bps) year over year.

Aggregate operating expenses in the fiscal first quarter were $139.7 million, up 3.4% year over year. Adjusted operating margin improved 30 bps year over year to 14.1% in the reported quarter.

Balance Sheet & Cash Flow

Exiting fiscal first quarter, Donaldson had cash and cash equivalents worth $199.9 million, down from $204.7 million recorded as of Jul 31, 2018. Long-term debt came in at $630.6 million, up from $499.6 million recorded at fiscal 2018-end.

In first-quarter fiscal 2019, the company generated $63.3 million cash from operating activities, down roughly 1% from the year-ago period. Capital expenditure in the reported quarter came in at $28.2 million, up 41.7% year over year.

Outlook

Donaldson perceives that ongoing contract wins, market share gains and favourable end-market conditions will aid it in boosting revenues and profitability in the quarters ahead. Moreover, the acquisition of BOFA International is expected strengthen the Industrial business of the company. The company plans to offset the impact of material price inflation with its ongoing pricing actions.

Based on the existing market conditions, Donaldson now anticipates earnings in the range of $2.31-$2.45 per share for fiscal 2019 (ending July 2019), reflecting an increment of 2 cents from the prior view. The BOFA buyout is expected to boost the company's sales by nearly 1% year over year in fiscal 2019. However, eliminating this impact, its revenue view is consistent with the prior guidance of 6-10%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Donaldson has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% 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 indicates a downward shift. Notably, Donaldson has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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