Donaldson Company, Inc. (DCI - Free Report) seems to have lost its growth momentum to the pandemic. It also faces headwinds from forex woes and high leverage. Notably, the company’s price performance has been weak and its earnings estimates have also been lowered lately, pointing toward bearish sentiments for the stock.
The company has a market capitalization of $6.2 billion and a Zacks Rank #4 (Sell) at present. It belongs to the Zacks Pollution Control industry, currently at the top 29% (with the rank of 73) of more than 250 Zacks industries.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
In third-quarter fiscal 2020 (ended Apr 30, 2020), the company’s earnings and sales surpassed estimates by 31.6% and 3.9%, respectively. However, on a year-over-year basis, its earnings declined 13.8% on weak sales performance and a fall in margins.
Year to date, the company’s shares have fallen 13.8% compared with the industry’s decline of 10.1%.
Factors Affecting Investment Appeal
Pandemic-Related Woes: Donaldson suffered from the adverse impacts of the pandemic in third-quarter fiscal 2020. Its sales in the quarter declined 11.7% year over year, with an organic sales decline of 9.7%. The performance was weak in the United States; Europe, Middle East and Africa; the Asia Pacific and Latin America as well as in Engine Products and Industrial Products segments.
The company expects the pandemic-related uncertainties to continue impacting its operations in the quarters ahead. Projections for both fiscal 2020 (ending July 2020) and 2021 (ending July 2021) were kept suspended. However, it did mention that sales in May will likely fall 24% year over year.
The Zacks Consensus Estimate for the company’s revenues is pegged at $2.55 billion for fiscal 2020, suggesting a decline of 10.5% from the year-ago reported number.
Leverage: High debts increase financial obligations and, in turn, hurt profitability. Donaldson’s long-term debts were $735.1 million at the end of third-quarter fiscal 2020, while its cash and cash equivalents were just $326.5 million. Interest expenses in the quarter totaled $4.4 million.
Also, the company seems to be more leveraged than the industry. Its debt to equity of 82.8% is higher than the industry’s 73.7%, while its long-term debt to capital was at 45.6% versus the industry’s 39.1%. Times interest earned in the quarter remained stable sequentially at 19.8x.
Woes Related to International Presence: The company has a diversified business structure, having operations in multiple countries. The diversification has exposed the company to geopolitical issues, macroeconomic challenges and unfavorable movements in foreign currencies. In the third quarter, its sales declined 2% on forex woes.
Bottom-Line Estimate Trend: The Zacks Consensus Estimate for Donaldson’s earnings has moved downward in the past seven days. The consensus estimate for earnings is currently pegged at $1.74 for fiscal 2020 and $1.79 for fiscal 2021, suggesting a decline of 1.1% and 1.6% from the seven-day-ago numbers. Notably, one downward revision each was recorded for the years in the past week.
Donaldson Company, Inc. Price and Consensus