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Donaldson (DCI) Up 7.6% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Donaldson (DCI - Free Report) . Shares have added about 7.6% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Donaldson due for a pullback? 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 Lags Q2 Earnings Estimates, Lowers View

Donaldson reported weaker-than-expected results for second-quarter fiscal 2019 (ended Jan 31, 2019), with a negative earnings surprise of 7.8%. This was the second consecutive quarter of weak results.

The company’s adjusted earnings in the reported quarter were 47 cents per share, lagging the Zacks Consensus Estimate of 51 cents. However, the bottom line increased 9.3% from the year-ago quarter’s figure of 43 cents on the back of sales growth and lower taxes, partially offset by higher raw material and supply-chain costs.

Segmental Performance Drives Revenues

In the fiscal second quarter, Donaldson’s net sales were $703.7 million, reflecting year-over-year growth of 5.9%. Notably, the BOFA International acquisition added 1.4% to sales growth while pricing had a positive 1.3% impact and other items added roughly 0.3%. This was partially offset by 2.7% negative impact of unfavorable movements in foreign currencies.

The top line lagged the Zacks Consensus Estimate of $717.3 billion by 1.9%.

On a geographical basis, the company’s net sales in the United States were $289.4 million, increasing 6.3% year over year. Sales in Europe, Middle East and Africa increased 8% year over year to $207.4 million while in the Asia Pacific sales were $149.3 million, reflecting year-over-year growth of 0.9%. Sales in Latin America were $57.6 million, up 9.9% year over year.

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 66.6% of net sales in second-quarter fiscal 2019) sales were roughly $469 million, reflecting year-over-year growth of 6%.

This improvement was primarily driven by growth of 22% in On-Road sales, 5.8% in Aftermarket sales, and 5% in Aerospace and Defense sales. Notably, Off-Road sales in the reported quarter were flat year over year.

Revenues generated from Industrial Products (accounting for 33.4% of net sales in second-quarter fiscal 2019) amounted to $234.7 million, increasing 5.6% from the year-ago quarter.

This year-over-year improvement in the reported quarter was driven by 13.5% growth in Industrial Filtration Solutions’ sales, partially offset by 16.7% decrease in Gas Turbine Systems’ sales and 3.6% fall in Special Applications’ sales.

Gross Margin Fall Y/Y, Operating Margin Flat

In the reported quarter, Donaldson’s cost of sales increased 7.3% year over year to $478.3 million. It represented 68% of net sales versus 67.1% in the year-ago quarter. Adjusted gross margin in the quarter was 32%, down 90 basis points (bps) year over year. The results were adversely impacted by sales mix as well as higher supply chain and raw material costs. However, favorable pricing was a relief.

Operating expenses grew 1.1% year over year to $140.3 million. It represented 19.9% of net sales versus 20.9% in the year-ago quarter. Adjusted operating margin in the quarter under review was 12.1%, flat year over year. Effective tax rate in the quarter was 24.8%, down from 25.7% in the year-ago quarter.

Balance Sheet & Cash Flow

Exiting second-quarter fiscal 2019, Donaldson’s cash and cash equivalents were $191.2 million, down 4.4% from $199.9 million recorded in the last reported quarter. Long-term debt was up 0.3% sequentially to $632.5 million.

In the first half of fiscal 2019, it repaid the long-term debt of $14.5 million while raised $135 million from long-term debts.

In the reported quarter, the company generated net cash of $79.5 million from operating activities, reflecting an increase of 73.2% from the year-ago tally. Capital expenditure totaled $38.9 million versus $25.9 million in the year-ago quarter. Free cash flow in the reported quarter was $40.6 million, up from $20 million in the year-ago quarter.

In the first half of fiscal 2019, the company used $102 million for purchasing treasury stocks and $48.7 million for paying dividends.


For fiscal 2019 (ending July 2019), Donaldson anticipates delivering record top and bottom-line results. Growth of business opportunities in emerging markets, technological investments and capacity expansion will be advantageous. However, the company is also concerned about adverse impacts of unfavorable movements in foreign currencies, and uncertainties related to global politics and trade.

Sales in fiscal 2019 are projected to increase 5-9%, down 2 percentage points from the previously stated range. Forex woes are predicted to have an adverse 3% impact versus 2% mentioned earlier. The BOFA buyout will add 1% to sales and pricing will have a favorable impact of 1-2%.

Engine sales will likely increase 6-10%, down 1 percentage point from the previous forecast. Within the Engine segment, Aftermarket and Off-Road sales are anticipated to grow in a low-single and high-single digit, respectively, reflecting downward revisions from the prior forecasts. On-Road sales are still predicted to grow in mid-teens range while

Aerospace and Defense sales will likely increase in a mid-single digit (reflecting increase from the prior guidance).

Industrial sales are projected to increase 4-8%, down roughly 3% from the previously mentioned range. Forex woes will adversely impact sales by 3% (versus 2% mentioned earlier) and BOFA acquisitions will add 4%. Businesses are predicted to be weak in Industrial Filtration Solutions and Special Applications.

The company’s operating margin is predicted to be 14.2-14.6%. Interest expenses will likely be approximately $21 million and capital expenditure will be $130-$150 million.

Earnings are expected to be $2.27-$2.41, down from previously mentioned $2.31-$2.45. The revised projection reflects year-over-year growth of 13-20%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, Donaldson has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Charting a somewhat similar path, 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 C. 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 #4 (Sell). We expect a below average return from the stock in the next few months.

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