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Donaldson (DCI) Displays Solid Prospects, Headwinds Persist

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On Nov 13, we issued an updated research report on Donaldson Company, Inc. (DCI - Free Report) .

In the past three months, this Zacks Rank #3 (Hold) stock has rallied 16.1% compared with the industry’s increase of 10.5%.


Existing Scenario

Donaldson has been gaining from strong demand for its razor-to-sell razor-blade products and dust collection replacement parts, particularly in China. Product launches, new program wins and growing e-commerce business are likely to drive its revenues in the quarters ahead.

Also, the company is poised to boost its competency on the back of its ongoing capital expenditure and innovation investments. In this regard, its capital expenditure totaled $38 million in fourth-quarter fiscal 2019 (ended July 2019), up 66.7% year over year. These investments were made toward capacity expansion projects.

Further, the BOFA International acquisition (closed on Oct 22, 2018) has been strengthening the company's Industrial Products segment. For fiscal 2020 (ending July 2020), Donaldson expects the BOFA buyout to add $9-$10 million to sales growth at the industrial filtration solutions business.

However, the company seems concerned about the tough operating environment. For fiscal 2020, the company anticipates global equipment production to be down in the low to mid-single-digit range. For fiscal 2020, it predicts sales to be in the range of 2% decline to 4% increase compared with 4% growth recorded in fiscal 2019 (ended July 2019).

In addition, escalating costs have been a major cause of concern. For instance, Donaldson’s cost of sales jumped 5.5% in fiscal 2019, while the same rose 2.4% in the fiscal fourth quarter mainly due to higher supply-chain and raw material costs. We believe that rising costs and expenses, if unchecked, will be detrimental to the company's margins.

Key Picks

Some better-ranked stocks from the Zacks Industrial Products sector are Albany International Corporation AIN, AZZ Inc. AZZ and Dover Corporation DOV. All these companies carry a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Albany International delivered average positive surprise of 21.27% in the trailing four quarters.

AZZ pulled off average positive surprise of 2.12% in the last four quarters.

Dover came up with average beat of 6.70% in the preceding four quarters.

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