Donaldson Gains From Aftermarket Business, Buyouts Amid Risks

On Jan 13, we issued an updated research report on Donaldson Company, Inc. (NYSE:DCI) .

Over the past six months, this Zacks Rank #3 (Hold) stock has yielded a return of 14.2% compared with the industry’s growth of 7.9%.

Existing Scenario

Donaldson expects that strength in its aftermarket business driven by popularity of innovative products, including PowerCore and strong aerospace and defense sales will aid its Engine Products segment’s revenues in fiscal 2020 (ending July 2020). Also, growth in industrial filtration solutions and gas turbine systems’ sales will likely support the Industrial Products segment. Notably, the company’s efforts on boosting sales of its Advance & Accelerate portfolio might be a boon.

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 $37.1 million in first-quarter fiscal 2020 (ended Oct 31, 2019), up 31.6% year over year. Also, in fiscal 2019 (ended Jul 31, 2019), it met the target of $150 million of capital expenditure. Notably, these investments were made toward capacity expansion projects.

In addition, the company's BOFA International acquisition (closed in October 2018) has strengthened industrial filtration solutions business in the Industrial Products segment. Notably, in the first quarter of fiscal 2020, the acquisition boosted Donaldson's sales by 1.1%. In the quarters ahead, BOFA will continue adding more values to the industrial filtration solutions business.

However, rise in debt level remains a concern for Donaldson. In the last five fiscal years (2015-2019), the company's long-term debt jumped 8.5% (CAGR), while the balance of $597 million at the end of first-quarter fiscal 2020 reflected 2.1% growth from the previous quarter. Also, it incurred interest expenses of $4.7 million in the fiscal first quarter, reflecting an increase of 11.9% from the year-ago quarter.

Further, analysts have become increasingly bearish on the company over the past couple of months. Consequently, the Zacks Consensus Estimate for its earnings has been lowered 0.9% to $2.26 for fiscal 2020 and 1.6% to $2.49 for fiscal 2021 (ending July 2021).

Stocks to Consider

Some better-ranked stocks from the Zacks Industrial Products sector include DXP Enterprises, Inc. (NASDAQ:DXPE) , Actuant Corporation (NYSE:EPAC) and Cintas Corporation (NASDAQ:CTAS) . While DXP Enterprises currently sports a Zacks Rank #1 (Strong Buy), Actuant and Cintas carry a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

DXP Enterprises outpaced estimates thrice in the trailing four quarters, the surprise being 17.67%, on average.

Actuant surpassed earnings estimates in each of the trailing four quarters, the surprise being 18.57%, on average.

Cintas topped estimates in each of the preceding four quarters, the surprise being 8.50%, on average.

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