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Can Donaldson (DCI) Maintain Momentum Despite Headwinds?

Investors have been encouraged by Donaldson Company, Inc.’s DCI striking performance of late, and consequently, its shares have appreciated 7.6% in the past six months, outperforming the industry’s average rise of 5.2%.

We believe that the company has several growth drivers in place and enjoys a robust foothold in its served markets, which should help it maintain growth momentum in the quarters ahead.

Factors to Consider

Donaldson perceives that strength in Off-Road, On-Road and Aftermarket business will drive revenues of its Engine Products segment, going forward. Also, the acquisition of BOFA International Ltd (BOFA) (closed on Oct 22, 2018) is expected strengthen the company’s Industrial Products segment. Donaldson expects its year-over-year sales growth to lie between 6% and 10% in fiscal 2019.

Donaldson is poised to boost its competency on the back of its ongoing capital expenditure and innovation investments. The company’s capital expenditure totaled $28.2 million in the fiscal first quarter, up 41.7% year over year. These investments were made to increase the company’s existing production capacity, support future demand of its fast-growing products and enhance its ecommerce business setup.

Successful product launches like LifeTec filters and new program wins, particularly in China, are likely to drive the company’s revenues growth in the quarters ahead.

However, weakening Gas Turbine Systems (GTS) business remains a major cause of concern for Donaldson. Revenues of the company’s GTS business declined 3.1% year over year in the first-quarter fiscal 2019, primarily on account of decline in large turbine projects. Donaldson expects that the issue will continue to weigh on the top-line performance of its Industrial Products segment in fiscal 2019. Notably GTS sales are predicted to dip in high single-digit in fiscal 2019.

Zacks Rank & Stocks to Consider

The stock currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks from the same space are Arista Networks, Inc. ANET, Amphenol Corp. APH and Apptio Inc. APTI. While Arista Networks sports a Zacks Rank #1 (Strong Buy), Amphenol and Apptio carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Arista Networks surpassed estimates in each of the trailing four quarters, the average positive earnings surprise being 13.35%.

Amphenol surpassed estimates in each of the trailing four quarters, the average positive earnings surprise being 5.28%.

Apptio outpaced estimates in each of the preceding four quarters, the average earnings surprise being 100.00%.

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