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Donaldson (DCI) Exhibits Bright Prospects, Headwinds Remain

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On Mar 25, we issued an updated research report on Donaldson Company, Inc. (DCI - Free Report) .

In the past six months, this Zacks Rank #3 (Hold) stock has gained 23.2% compared with the industry’s growth of 30%.

Existing Business Scenario

Donaldson is poised to benefit from its strong portfolio of replacement and process filtration products, along with focus on innovation and supply-chain optimization actions, and growth investments. For fiscal 2021, the company anticipates sales to grow 5-8% on a year-over-year basis, on the back of recovery in end markets.

Also, the company’s solid cash flows allow it to effectively deploy capital for repurchasing shares and paying out dividend. Notably, in the second quarter of fiscal 2021 (ended January 31, 2021), the company’s free cash flow increased 28.5% to $61.8 million on a year-over-year basis. Also, in the quarter, it repurchased shares worth $30.7 million and paid out dividends worth $26.5 million. Further, for fiscal 2021 (ending July 2021), it expects free cash flow conversion to be in excess of 100%.

However, Donaldson has been witnessing persistent weakness across its Industrial Filtration Solutions and Special Applications businesses, due to challenged end-market demand environment.  

Further, the company expects to face headwinds from the rise in incentive compensation in the second half of fiscal 2021. Also, a hike in the expenses that got subdued due to the pandemic might be concerning for the company.

Key Picks

Some better-ranked stocks from the same space are Energy Recovery, Inc. (ERII - Free Report) , Heritage-Crystal Clean, Inc (HCCI - Free Report) and Sharps Compliance Corp. (SMED - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Energy Recovery delivered a trailing four-quarter earnings surprise of 232.08%, on average.

Heritage-Crystal delivered a trailing four-quarter earnings surprise of 74.45%, on average.

Sharps Compliance delivered a trailing four-quarter earnings surprise of 231.67%, on average.

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