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Donaldson (DCI) Benefits From End Markets, Hurt by Cost Woes

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Donaldson Company, Inc. (DCI - Free Report) is poised to gain from its presence in the diverse end markets, enabling it to offset risks associated with a single market. In the quarters ahead, strength across DCI’s construction, aerospace, mining, defense, and food & beverage is likely to drive its performance. DCI’s strong product portfolio, focus on innovation, solid demand and growth investments are anticipated to benefit it over time.

Donaldson has always been keen on expanding its business through acquisitions and alliances. The acquisition of Solaris Biotechnology in November 2021 has been strengthening its presence across the end markets like biopharma, food and beverage, and other major life sciences. DCI also bought Pearson Arnold Industrial Services in the same month.

DCI focuses on rewarding its shareholders through dividend payouts and share repurchase programs. DCI paid out dividends worth $81.8 million and bought back shares worth $153.7 million in the nine months of fiscal 2022 (ended April 2022). Donaldson’s quarterly dividend was hiked 4.5% in May 2022. It expects a free cash flow conversion of 50-60% and plans to buy back 2-2.5% of its outstanding shares for fiscal 2022 (ending July 2022).

However, challenges related to supply chain and cost woes pose a concern. Donaldson’s cost of sales advanced 15.2% year over year and its operating expenses rose 6.3% in third-quarter fiscal 2022 (ended April 2022). Its gross margin declined 220 basis points in the quarter. High freight, labor and raw material costs might be concerning for DCI in the quarters ahead.

Donaldson’s global presence exposes it to various environmental laws and regulations in its operating countries. Also, DCI remains vulnerable to foreign-currency and geopolitical issues. Forex woes hampered sales 2.9% year over year in the fiscal third quarter. In the quarters ahead, DCI’ overseas business might be depressed by a stronger U.S. dollar.

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In the past three months, this currently Zacks Rank #3 (Hold) stock has dropped 9.4% compared with the industry’s decline of 15.4%.

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