It has been about a month since the last earnings report for Donaldson (
DCI Quick Quote DCI - Free Report) . Shares have lost about 6.8% 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 drivers.
Donaldson Q4 Earnings Meet Estimates, Sales Dip Y/Y
Donaldson’s fourth-quarter fiscal 2023 (ended Jul 31, 2023) earnings of 78 cents per share met the Zacks Consensus Estimate, while sales missed the same by 1.9%.
The bottom line declined 7.1% from the year-ago quarter’s 84 cents per share. Sales Results
In the fiscal fourth quarter, Donaldson’s net sales reached $879.5 million, reflecting year-over-year decline of 1.2%. In the reported quarter, sales decreased due to volume declines in Mobile Solutions and Life Sciences segments. The top line missed the Zacks Consensus Estimate of $896 million.
Region-wise, DCI’s net sales in the United States/Canada decreased 2% year over year. The same decreased 12.6% in Latin America and 6.9% in the Asia Pacific. However, the top line expanded 7.3% in Europe, the Middle East and Africa. Donaldson started reporting sales under three segments starting the fiscal second quarter of 2023. The segments are as follows: Mobile Solutions, Industrial Solutions and Life Sciences. A brief snapshot of the segmental sales is provided below: The Mobile Solutions segment’s (accounting for 61.7% of net sales in fourth-quarter fiscal 2023) sales were $542.5 million, reflecting a year-over-year decline of 4.8%. The results were negatively impacted by 0.4% decline in Off-Road and 6.7% decline in aftermarket sales. However, On-Road increased 5.5% in the quarter. Sales generated from the Industrial Solutions segment (accounting for 31.5% of net sales in fourth-quarter fiscal 2023) were $277.1 million, increasing 9.9% from the year-ago fiscal quarter. The results benefited from sales growth of 10.8% in Industrial Filtration Solutions and 4.3% in Aerospace and Defense. Sales generated from Life Sciences (accounting for 6.8% of net sales in fourth-quarter fiscal 2023) were $59.9 million, decreasing 11.9% from the year-ago fiscal quarter. Margin Profile
In the fiscal fourth quarter, Donaldson’s cost of sales increased 3.2% year over year to $579.4 million. Gross profit jumped 2.9% to $300.1 million. The gross margin increased 130 basis points (bps) to 34.1%. The margin results benefited from pricing benefits and the stabilization of input costs.
Operating expenses increased 10.6% year over year to $179.6 million. Operating profit in the quarter under review decreased 6.8% to $120.5 million. The operating margin was 13.7%, decreasing 80 bps year over year. The effective tax rate in the quarter was 21.7% compared with 21.4% in the year-ago quarter. Balance Sheet & Cash Flow
Exiting fourth-quarter fiscal 2023, Donaldson’s cash and cash equivalents were $187.1 million compared with $193.3 million recorded in the fourth quarter of fiscal 2022. Long-term debt was down 22.9% year over year to $496.6 million.
In fiscal 2023, Donaldson repaid its long-term debt of $219.6 million. In the same time period, DCI generated net cash of $544.5 million from operating activities, reflecting an increase of 115.4% from the year-ago figure. Capital expenditure (net) totaled $118.1 million compared with $85.1 million in the year-ago fiscal period. Free cash flow increased 154% to $426.3 million. DCI also used $141.8 million to repurchase treasury stocks and $114.4 million to pay out dividends during fiscal 2023. 2024 Outlook
For fiscal 2024 (ending July 2024), Donaldson expects earnings per share to be $3.14-$3.30. The company anticipates adjusted earnings to be $2.90-$3.04 per share. The Zacks Consensus Estimate for earnings is $3.16 per share. Sales are anticipated to increase 3-7% from the fiscal 2023 level. Positive pricing is anticipated to have an accretive impact of 2%. However, movement in foreign currencies is expected to negatively impact sales by 1%.
On a segmental basis, Mobile Solutions’ sales are anticipated to increase 1-5% from the fiscal 2023 level. The segment’s performance is likely to benefit from mid-single-digit growth in the aftermarket. On-road and off-road sales are both expected to be up in low-single digit, respectively. Sales growth for Industrial Solutions is anticipated to be 3-7% from the fiscal 2023 figure. The segment is likely to gain from mid-single-digit growth in Industrial Filtration Solutions and low-single digits growth in Aerospace and Defense. The company expects its Life Sciences segment’s sales to increase approximately 20%. Interest expenses are predicted to be approximately $25 million. The effective tax rate is anticipated to be 24-26%. Capital expenditure for the fiscal year is expected to be $95-$115 million. Free cash flow conversion is anticipated to be 95-105%. Share buybacks are expected to account for 2% of the outstanding shares. How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision.
The consensus estimate has shifted -7.27% due to these changes.
Currently, Donaldson has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, 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 A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Donaldson has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.