A month has gone by since the last earnings report for Donaldson (DCI Quick QuoteDCI - Free Report) . Shares have lost about 0.3% in that time frame, outperforming 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 & Revenues Top Estimates, Up Y/Y

Donaldson reported better-than-expected fourth-quarter fiscal 2019 (ended Jul 31, 2019) results.  

The company’s adjusted earnings came in at 61 cents per share, surpassing the Zacks Consensus Estimate of 60 cents. Also, the bottom line increased 5.2% from the year-ago quarter’s figure of 58 cents on sales growth, partially offset by higher raw material and supply-chain costs.

For fiscal 2019, the company’s adjusted earnings came in at $2.21 per share, up 10.5% on a year-over-year basis.

Inside the Headlines

In the fiscal fourth quarter, Donaldson’s net sales were $726.9 million, reflecting year-over-year growth of 0.3%. Notably, the BOFA International acquisition added 1.3% to sales growth while pricing had a positive 0.9% impact and other items added roughly 0.6%. This was partially offset by 2% negative impact of unfavorable movements in foreign currencies.

Moreover, the top line beat the Zacks Consensus Estimate of $723 billion by roughly 0.6%.

For fiscal 2019, Donaldson reported net sales of $2,844.9 million, up 4% on a year-over-year basis.

Region wise, the company’s net sales in the United States increased 0.9% year over year. Sales in Europe, Middle East and Africa grew 3.2% while the same for Asia Pacific decreased 4%. Sales in Latin America decreased 0.8%.

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 67% of net sales in fourth-quarter fiscal 2019) sales were roughly $486.8 million, reflecting year-over-year decline of 1.1%.

The decline was primarily attributable to the 10.1% fall in Off-Road sales. This was partially offset by growth of 1.5% in On-Road sales, 0.3% in Aftermarket sales, and 4% in Aerospace and Defense sales.

Revenues generated from Industrial Products (accounting for 33% of net sales in fourth-quarter fiscal 2019) amounted to $240.2 million, increasing 3.3% from the year-ago quarter.

The rise was primarily driven by growth in 6.9% in Gas Turbine Systems’ sales and 6.2% rise in Industrial Filtration Solutions’ sales. This was partially offset by 8.8% fall in Special Applications’ sales.

Gross & Operating Margins

In the reported quarter, Donaldson’s cost of sales increased 2.4% year over year to $483.1 million. It represented 66.4% of net sales compared with 65.1% in the year-ago quarter. Adjusted gross margin was 33.5%, down 140 basis points (bps) year over year. Results were adversely impacted by unfavorable mix of product sales within markets as well as higher supply-chain and raw material costs. However, favorable pricing was a relief.

Operating expenses declined 3.6% to $139.4 million. It represented 19.2% of net sales compared with 20% in the year-ago quarter. Adjusted operating margin was 14.4%, down 50 bps year over year. Adjusted effective tax rate in the quarter was 21.4%, down from 26.2%.

Balance Sheet & Cash Flow

Exiting fourth-quarter fiscal 2019, Donaldson’s cash and cash equivalents were $177.8 million, down from $203.8 million recorded in the last reported quarter. Long-term debt was down 9.3% sequentially to $584.4 million.

In fiscal 2019, the company repaid long-term debt of $45.9 million while raised $155 million from long-term debts.

In the reported quarter, Donaldson generated net cash of $122.5 million from operating activities, reflecting an increase of 17.6% from the year-ago figure. Capital expenditure totaled $38 million compared with $22.8 million in the year-ago quarter. Free cash flow was $84.5 million, up from $81.4 million.

Rewards to Shareholders

In fiscal 2019, the company used $129.2 million for purchasing treasury stocks and $99.7 million for paying dividends.

Outlook

Sales for fiscal 2020 are projected in a range of 2% decline to 4% increase. Forex woes are predicted to have an adverse 1-2% impact. The company’s pricing actions will add about 1% to sales.

Engine sales are likely to be in a range of 4% decline to 2% increase. Industrial sales are projected to increase 2-8% year over year.

Forex woes are likely to adversely impact sales of both segments by 1-2%.

The company’s operating margin is predicted to be 13.9-14.5% compared with 13.6% in fiscal 2019. Interest expenses are expected to be in range of $18-$20 million, and capital expenditure will be between $110 million and $130 million. Effective income tax rate will be 25-27%.

GAAP earnings are expected to be $2.21-$2.37. In fiscal 2019, it reported GAAP and adjusted earnings of $2.05 and $2.21, respectively. Share buybacks for the year are likely to be roughly 2% of the company’s outstanding shares.

How Have Estimates Been Moving Since Then?

Estimates revision followed a downward path over the past two months. The consensus estimate has shifted -6.58% due to these changes.

VGM Scores

At this time, Donaldson has a strong 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 D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Donaldson has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.