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Donaldson (DCI) Displays Bright Prospects, Risks Remain

Zacks Equity Research

On Aug 12, we issued an updated research report on Donaldson Company, Inc. DCI.

In the past month, this Zacks Rank #3 (Hold) stock has rallied 0.5% against the industry’s decline of 1.4%.



Existing Scenario

Donaldson has been gaining from rising popularity of its razor-to-sell razor-blade products and dust collection replacement parts as well as growth in e-commerce business. Successful product launches and new program wins 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 $45.3 million in third-quarter fiscal 2019 (ended April 2019), up 66% year over year. These investments were made toward capacity expansion projects — mainly those related to PowerCore, fuel and process filtration — across the world.

Moreover, the acquisition of BOFA International LTD (closed on Oct 22, 2018) has strengthened the company's Industrial Products segment. For fiscal 2019 (ended July 2019), Donaldson expects the buyout to add 1% to sales.

However, the weakening Gas Turbine Systems (“GTS”) business is a major cause of concern for the company. Notably, revenues from the business fell 14.2% year over year in the fiscal third quarter, primarily on account of lower sales to new projects. In fact, GTS sales are predicted to dip in high single-digit in fiscal 2019.

Further, escalating costs have been a major cause of concern for the company over the past few quarters. For instance, Donaldson’s cost of sales jumped 6.6% in the first three quarters of fiscal 2019 while the same rose 2.6% in the fiscal third 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.

Stocks to Consider

Some better-ranked stocks from the Zacks Industrial Products sector are Albany International Corporation AIN, Zebra Technologies Corporation ZBRA and Tetra Tech, Inc. TTEK. While Albany International and Zebra Technologies currently sport a Zacks Rank #1 (Strong Buy), Tetra Tech carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Albany Internationaldelivered average positive surprise of 15.98% in the trailing four quarters.

Zebra Technologies pulled off average positive surprise of 5.61% in the last four quarters.

Tetra Tech came up with average beat of 8.72% in the preceding four quarters.

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