A month has gone by since the last earnings report for Donaldson (
DCI Quick Quote DCI - Free Report) . Shares have lost about 1.8% 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 Tops on Q2 Earnings, Gives Impressive View
Donaldson reported better-than-expected results for the second quarter of fiscal 2021 (ended January 31, 2021). Its earnings beat the Zacks Consensus Estimate by 2% and sales surpassed the same by 3.8%.
The company’s earnings in the reported quarter were 52 cents per share, surpassing the Zacks Consensus Estimate of 51 cents. Also, the bottom line increased 4% from the year-ago quarter’s figure of 50 cents on the back of sales growth and margin improvements. Top-Line Results
In the fiscal second quarter, Donaldson’s net sales were $679.1 million, reflecting year-over-year growth of 2.6%. Also, the top line surpassed the Zacks Consensus Estimate of $654 million.
On a geographical basis, the company’s net sales in the United States/Canada decreased 4.2% year over year. However, results benefitted from 3.6% growth in Europe, Middle East and Africa’s sales, an 11.7% expansion in the Asia Pacific sales, and a 7.7% increase in sales from Latin America. The company 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 68.1% of net sales in second-quarter fiscal 2021) sales were $462.4 million, reflecting year-over-year growth of 6.2%. The results were positively impacted by growth of 15.4% in Off-Road and 7.2% in Aftermarket sales. However, On-Road sales declined 1.2% and that from Aerospace and Defense decreased 20.4%. Revenues generated from Industrial Products (accounting for 31.9% of net sales in second-quarter fiscal 2021) were $216.7 million, decreasing 4.3% from the year-ago quarter. Results suffered from a sales decline of 3.3% in Industrial Filtration Solutions, an 8.1% fall in Special Applications’ sales and a 3.5% fall in sales from Gas Turbine Systems. Margin Profile
In the reported quarter, Donaldson’s cost of sales increased 3.4% year over year to $453.8 million. It represented 66.8% of net sales versus 66.3% in the year-ago quarter. Adjusted gross profit increased 3.5% year over year to $231.1 million, while adjusted gross margin grew 30 basis points (bps) to 34%. The margin results benefitted from lower costs related to raw materials, partially offset by unfavorable sales mix.
Adjusted operating expenses increased 1.1% year over year to $140.2 million. It represented 20.6% of net sales versus 21% in the year-ago quarter. Adjusted operating profit in the quarter under review increased 7.6% year over year to $90.9 million. Adjusted operating margin was 13.4%, up 60 bps year over year. Effective tax rate in the quarter was 23.9% as compared with 22.2% in the year-ago quarter. Balance Sheet & Cash Flow
Exiting second-quarter fiscal 2021, Donaldson’s cash and cash equivalents were $207.3 million, down 23.2% from $270 million recorded in the last reported quarter. Long-term debt was down 14.1% sequentially to $495.1 million.
In the first half of fiscal 2021, the company repaid the long-term debt of $125 million. In the second quarter of fiscal 2021, Donaldson generated net cash of $73.4 million from operating activities, reflecting a decline of 19.1% from the year-ago figure. Capital expenditure totaled $11.6 million versus $42.6 million in the year-ago quarter. Free cash flow in the reported quarter increased 28.5% year over year to $61.8 million. In the first half, the company used $46.3 million for repurchasing shares and $53.1 million for paying out dividends. Outlook
Donaldson is hopeful to gain from the recovery in end markets in fiscal 2021 (ending July 2021). It also believes that the pandemic-related uncertainties will exist during the year.
For fiscal 2021, it expects adjusted earnings per share of $2.17-$2.25. This projection excludes restructuring charges of 8 cents associated with actions taken in the second quarter. Notably, adjusted earnings were $2.00 per share in fiscal 2020. Movements in foreign currencies are anticipated to boost sales by 3%. On a segmental basis, sales are anticipated to increase 8-12% year over year for Engine Products in the year, while that of Industrial Products will be between a decline of 2% and an increase of 2%. Adjusted operating margin is expected to be 13.8-14.2% in fiscal 2021, up from 13.2% in fiscal 2020. Interest expenses are predicted to be $13 million, other income is likely to be $2-$4 million and effective tax rate is anticipated to be 24-25%. Capital expenditure in the year is expected to be $55-$65 million and cash flow conversion is anticipated to exceed 100%. Share buybacks will be 1-2% of outstanding shares. How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 5.09% due to these changes.
At this time, Donaldson has a nice Growth Score of B, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% 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.
Estimates have been broadly trending upward 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.