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Donaldson (DCI) Up 0.1% Since Last Earnings Report: Can It Continue?

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  • DCI

A month has gone by since the last earnings report for Donaldson (DCI). Shares have added about 0.1% in that time frame, underperforming 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 drivers.

Donaldson Beats Q3 Earnings Estimates, Raises FY21 View

Donaldson reported impressive results for the third quarter of fiscal 2021 (ended Apr 30, 2021). Its earnings exceeded the Zacks Consensus Estimate by 13.79%, whereas, sales surpassed the same by 8.12%.

The company’s earnings in the reported quarter were 66 cents per share, beating the Zacks Consensus Estimate of 58 cents. Also, the bottom line increased 32% from the year-ago quarter’s 50 cents. Sales growth in the reported quarter more than offset the headwinds caused by supply-chain constraints, rise in the cost of raw material and unfavorable sales mix.

Revenue Results

In the fiscal third quarter, Donaldson’s net sales were $765 million, reflecting year-over-year growth of 21.5%. Also, the top line surpassed the Zacks Consensus Estimate of $708 million.

On a geographical basis, the company’s net sales in the United States/Canada increased 11.1% year over year. Likewise, the top-line results expanded 27.8% in Europe, Middle East and Africa’s sales, 25.3% in the Asia Pacific, and 44.6% in Latin America.

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 69.4% of net sales in third-quarter fiscal 2021) sales were $531 million, reflecting year-over-year growth of 26.3%.

The results were positively impacted by growth of 50.7% in Off-Road, 58.2% in On-Road and 23% in Aftermarket sales. However, sales declined 19.1% in Aerospace and Defense.

Revenues generated from Industrial Products (accounting for 30.6% of net sales in third-quarter fiscal 2021) were $234 million, increasing 11.8% from the year-ago quarter.

Results benefitted from sales growth of 19.2% in Industrial Filtration Solutions and 4.9% in Special Applications, partially offset by 12.6% decline in Gas Turbine Systems.

Margin Profile

In the reported quarter, Donaldson’s cost of sales increased 20.6% year over year to $507 million. It represented 66.3% of net sales versus 66.8% in the year-ago quarter. Adjusted gross profit increased 23.3% year over year to $258 million, while adjusted gross margin grew 50 basis points (bps) to 33.7%. The margin results benefitted from volume growth and favorable pricing, offset by unfavorable sales mix, inflation in freight rate and a hike in commodity prices.

Adjusted operating expenses increased 19.2% year over year to $148.6 million. It represented 19.4% of net sales versus 19.8% in the year-ago quarter. Adjusted operating profit in the quarter under review increased 29.5% year over year to $109.4 million. Adjusted operating margin was 14.3%, up 90 bps year over year.

Effective tax rate in the reported quarter was 23.9% as compared with 24.9% in the year-ago quarter.

Balance Sheet & Cash Flow

Exiting third-quarter fiscal 2021, Donaldson’s cash and cash equivalents were $215.3 million, up 3.9% from $207.3 million recorded in the last reported quarter. Long-term debt was down 8.2% sequentially to $454.6 million.

In the first three quarters of fiscal 2021, the company repaid the long-term debt of $165 million.

In the reported quarter, it generated net cash of $103.3 million from operating activities, reflecting an increase of 16.9% from the year-ago figure. Capital expenditure totaled $9.8 million versus $26.5 million in the year-ago quarter. Free cash flow in the reported quarter increased 51.1% year over year to $93.5 million.

In the first three quarters of fiscal 2021, the company used $78.7 million for repurchasing shares and $79.5 million for paying out dividends.

Outlook

For the rest of fiscal 2021 (ending July 2021), Donaldson anticipates benefitting from solid demand and backlog. However, supply-chain challenges are likely to hurt.

It expects adjusted earnings per share of $2.28-$2.34 in the year, higher than $2.17-$2.25 mentioned previously. The projections exclude restructuring charges of 8 cents associated with actions taken in the fiscal second quarter.

Sales are anticipated to increase 9-11% year over year, as compared with 5-8% growth stated earlier. Movements in foreign currencies are anticipated to boost sales by 3%.

On a segmental basis, sales are anticipated to increase 12-14% (versus the previously mentioned 8-12%) year over year for Engine Products in the year. The segment’s performance will likely benefit from growth in On-Road, Off-Road and Aftermarket sales, partially offset by a fall in Aerospace and Defense.

Sales growth for Industrial Products is anticipated to be 3-5% year over year, as compared with (2%)-2% mentioned previously. The segment will likely benefit from growth in Industrial Filtration Solutions, partially offset by weakness in Special Applications and Gas Turbine Systems.

Adjusted operating margin is expected to be 13.8-14.2% for fiscal 2021, suggesting a rise from 13.2% reported in fiscal 2020. Interest expenses are predicted to be $13 million. Other income is likely to be $5-$7 million (higher than previously stated $2-$4 million). Effective tax rate is anticipated to be 24-25%. Capital expenditure for the fiscal year is expected to be $55-$60 million (versus $55-$65 million stated earlier). Cash flow conversion is anticipated to exceed 100%. Share buybacks will be 1.5-2% (versus the previously mentioned 1-2%) of outstanding shares.

How Have Estimates Been Moving Since Then?

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

VGM Scores

Currently, Donaldson has a nice Growth Score of B, a grade with the same score on the momentum front. Following the exact same course, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Donaldson has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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