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Donaldson (DCI) Exhibits Strong Prospects, Risks Persist

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Donaldson Company, Inc. (DCI - Free Report) stands to gain from its solid product portfolio, growth investments and focus on operational execution and innovation. Strength across the company’s aerospace & defense, off-road and aftermarket businesses and higher demand for industrial filtration solutions, special applications and gas turbine systems products are likely to drive its performance in the quarters ahead. Net sales are likely to increase 11-15% year over year in fiscal 2022 (ending July 2022), higher than 8-12% anticipated earlier.

The company intends to strengthen and expand its businesses through the addition of assets. Its Solaris Biotechnology buyout (November 2021) has been boosting its presence across several end markets, including food and beverage, biopharma and other major life sciences. The company also acquired Pearson Arnold Industrial Services in the same month.

DCI remains focused on rewarding shareholders through dividend payouts and share buyback programs. For instance, in the first six months of fiscal 2022 (ended January 2022), Donaldson used $54.6 million for paying out dividends and repurchasing shares worth $115.6 million. The quarterly dividend rate was hiked by 4.8% in May 2021. The company expects free cash flow conversion of 70-80% and plans to buy back 2% of its outstanding shares for fiscal 2022.

However, escalating costs and expenses have been a major concern for the company over time. In second-quarter fiscal 2022 (ended January 2022), its cost of sales increased 21.8% on a year-over-year basis. Also, its operating expenses rose 3.2%. In the quarter, its gross margin declined 210 basis points year over year. For fiscal 2022, it expects high costs of raw materials, freight and labor, which is likely to adversely impact its margins and profitability.

Given the company’s extensive presence across international markets, its operations are subject to risks associated with unfavorable movements in foreign currencies and geopolitical issues. It anticipates foreign exchange headwinds to have an adverse impact of 2% on its sales in fiscal 2022.

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In the past three months, this Zacks Rank #3 (Hold) stock has lost 9.5% compared with the industry’s decline of 12.3%.

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