Donaldson (DCI) Down 2.5% Since Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Donaldson Company, Inc. (NYSE:DCI) . Shares have lost about 2.5% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Donaldson Q3 Earnings & Revenues Beat, Guidance Raised

Donaldson scored a hat-trick of earnings beats, as its third-quarter fiscal 2017 results surpassed estimates by $0.01. The premium filtration products provider’s adjusted earnings per share of $0.45 beat the Zacks Consensus Estimate of $0.44 by 2.3%.

On a GAAP basis, the bottom-line figure of $0.45 was up 4.6% from $0.43 recorded in the prior-year quarter. Absence of pre-tax restructuring charges, sturdy top-line growth and streamlined operations proved conducive to the earnings performance.

Inside the Headlines

Donaldson reported total sales of $608.2 million, up 6.5% on a year-over-year basis. Also, revenues surpassed the Zacks Consensus Estimate of $579 million. Strong performance by the Engine Products segment drove the top line. The segment has been benefiting substantially from stabilization in market conditions and robust sales of replacement parts, resulting in overall top-line growth.

Revenues at the segment were up 13.5% year over year to $405.6 million. All the four sub-businesses within this segment – Aftermarket, Aerospace and Defense, and On Road and Off Road – grew on a year-over-year basis. Off-Road (up 27.5%), Aerospace and Defense (up 22.3%) and Aftermarket (11.1%) recorded double-digit growth. Meanwhile, On Road sub-segment (up 1.6%) returned to growth after a couple of sluggish quarters.

On the other hand, revenues at the Industrial Products segment declined 5.3% in fiscal 2017 to $202.6 million compared with the prior-year quarter. Lackluster performance by Gas Turbines Systems, which plunged 34.5% year over year, weighed on revenues. However, the Special Applications business, which was up 12.1%, offset this fall to some extent. Overall, sluggishness in first-fit demand, along with economic and geopolitical uncertainty, is hurting the profitability of this segment.

Donaldson’s adjusted operating margin expanded 70 basis points (bps) to 14.5% in the fiscal third quarter. In addition, the company’s Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) were $107.6 million, up from $96.7 million recorded a year ago.

Liquidity & Cash Flow

Donaldson exited the quarter with cash and equivalents of $295.9 million compared with $243.2 million as of Jul 31, 2016. The company had long-term debt of $298.1 million as of Apr 30, 2017 compared with $350.2 million as of Jul 31, 2016.

Share Repurchase Program/Dividends

During the fiscal third quarter, the company repurchased 1.3 million shares of its common stock for a total investment of $58.6 million. This takes the company’s overall year-to-date share repurchase to 2.7 million for a total investment of $110.4 million. Additionally, Donaldson paid $69.5 million in dividends year to date, out of which $23.1 million were paid during the fiscal third quarter.

2017 Guidance Raised

Concurrent with the earnings release, the company raised both its bottom- and top-line guidance for fiscal 2017 for the second time in a row. Donaldson projects fiscal 2017 adjusted earnings per share in the range of $1.67–$1.71 compared with the earlier guidance of $1.60–$1.68. The company believes that benefit from the Northern Technical, L.L.C. escrow settlement, which occurred in the fiscal first quarter, will supplement earnings growth.

Currently, the company projects fiscal 2017 sales to increase up to 6% from fiscal 2016, up from the previously guided range of 2–4%. The guidance hike is primarily attributable to the additional sales accruing from the recently acquired filtration systems firm, Hy-Pro Corporation. However, currency fluctuation is expected to play a spoilsport, offsetting some of this improvement.

In terms of segments, Donaldson estimates Engine Products sales to rise 10–11% year over year, mainly supported by robust performance of Aftermarket, Off-Road, and Aerospace and Defense. Also, the segment is expected to benefit by approximately $6 million from the recent acquisition of Hy-Pro.

For the Industrial Products segment, the company expects sales to decline in the range of 3–2% on a year-over-year basis. Unimpressive Gas Turbine Systems and Special Applications performance are expected to play spoilsport.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There have been six revisions higher for the current quarter In the past month. The consensus estimate has shifted by 6.1% due to these changes.

VGM Scores

At this time, Donaldson's stock has a nice Growth Score of 'B', while it is lagging a bit on the momentum front with 'C'. Charting a same path, the stock was allocated a grade of 'C' on the value side, putting it in the middle 20% 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.

Based on our scores, the stock is more suitable for growth investors than momentum and value investors.

Outlook

Estimates have been trending upward for the stock. The magnitude of these revisions also looks promising. It comes with little surprise that the stock has a Zacks Rank #2 (Buy). We are expecting an above average return from the stock in the next few months.