It has been about a month since the last earnings report for Donaldson (DCI Quick QuoteDCI - 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 Q2 Earnings Lags Estimates, Revenues Beat

Donaldson’s second-quarter fiscal 2022 (ended Jan 31, 2021) earnings missed the Zacks Consensus Estimate by 8.1%, while sales surpassed the same by 3.6%.

The company’s earnings in the reported quarter were 57 cents per share, lagging the Zacks Consensus Estimate of 62 cents. The bottom line improved 9.6% from the year-ago quarter’s 52 cents. Sales growth in the reported quarter more than offset the headwinds stemming from supply-chain constraints and higher cost of raw material.

Revenue Results

In the fiscal second quarter, Donaldson’s net sales were $802.5 million, reflecting year-over-year growth of 18.2%. The top line surpassed the Zacks Consensus Estimate of $774 million.

Region-wise, the company’s net sales in the United States/Canada increased 22.6% year over year. The top line expanded 20.2% in Europe, the Middle East and Africa, 5.5% in the Asia Pacific and 26.9% in 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 69% of net sales in second-quarter fiscal 2022) sales were $554.1 million, reflecting year-over-year growth of 19.8%.

The results were positively impacted by growth of 22.6% in Off-Road, 29.6% in Aerospace and Defense and 20.6% in Aftermarket sales. However, sales declined 0.7% in On-Road.

Revenues generated from Industrial Products (accounting for 31% of net sales in second-quarter fiscal 2022) were $248.4 million, increasing 14.6% from the year-ago quarter.

Results benefited from sales growth of 14.1% in Industrial Filtration Solutions, 9.8% in Special Applications and 26.3% in Gas Turbine Systems.

Margin Profile

In the quarter, Donaldson’s cost of sales increased 21.8% year over year to $552.7 million. Gross profit jumped 10.9% to $249.8 million, while gross margin declined 210 basis points (bps) to 31.1%. The margin results were negatively impacted by higher raw material costs, labor and freight, partially offset by volume growth and favorable pricing.

Operating expenses increased 3.2% year over year to $154.1 million. Operating profit in the quarter under review soared 25.8% to $95.7 million. Operating margin was 11.9%, up 70 bps year over year.

Effective tax rate in the quarter was 24.1% compared with 23.9% in the year-ago quarter.

Balance Sheet & Cash Flow

Exiting second-quarter fiscal 2022, Donaldson’s cash and cash equivalents were $170.4 million, down 15.1% from $200.8 million recorded in the last reported quarter. Long-term debt was up 1.1% sequentially to $553.9 million.

In the first six months of fiscal 2022, the company repaid the long-term debt of $75 million.

In the reported quarter, it generated net cash of $36.9 million from operating activities, reflecting a decrease of 49.6% from the year-ago figure. Capital expenditure (net) totaled $15.2 million compared with $11.6 million in the year-ago quarter. Free cash flow decreased 64.9% to $21.7 million.

In the first six months of fiscal 2022, the company used $115.6 million for repurchasing shares and $54.6 million for paying out dividends.

Outlook

For fiscal 2022 (ending July 2022), Donaldson anticipates benefiting from solid demand for its products. However, supply-chain challenges weigh on the company.

It expects earnings per share of $2.66-$2.76 compared with $2.57-$2.73 predicted earlier. Sales are anticipated to increase 11-15% year over year compared with 8-12% guided previously. Movements in foreign currencies are expected to have a negative impact of 2% on sales.

On a segmental basis, Engine Products sales are anticipated to increase 12-16% year over year. The segment’s performance is likely to benefit from growth in Off-Road and Aftermarket sales. Also, growth in Aerospace and Defense sales is anticipated. However, supply chain issues might hurt On-Road sales.

Sales growth for Industrial Products is anticipated to be 9-13% year over year. The segment is likely to gain from solid momentum in Industrial Filtration Solutions, Gas Turbine Systems and Special Applications.

Operating margin is expected to be 14-14.4% for fiscal 2022. Interest expenses are predicted to be $14 million. Other income is likely to be $7-$11 million. Effective tax rate is anticipated to be 24-26%.

Capital expenditure for the fiscal year is expected to be $90-$110 million. Free cash flow conversion is anticipated to be 70-80%. Share buybacks will account for 2% of outstanding shares.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month.

VGM Scores

At this time, Donaldson has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Donaldson has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.