We have issued an updated research report on Donaldson Company, Inc. (NYSE:) on Apr 2.
This pollution control company currently carries a Zacks Rank #4 (Sell). Its market capitalization is approximately $6.6 billion.
Let’s delve deeper and discuss what led to the company’s poor investment appeal.
Share Price Performances & Poor Valuation: Market sentiments have been against Donaldson for quite some time now. Its stock price has decreased roughly 10.9% in the past six months versus the industry’s decline of 6.8%.
Also, the stock appears overvalued compared with the industry. On an Enterprise Value/EBITDA (TTM) basis, the company’s shares are currently trading at 15.4x compared with the industry’s 9.5x. Also, Donaldson's multiple is higher than the industry's six-month highest level of 10.3x.
Earnings Estimate Revision: Donaldson delivered weaker-than-expected results for second-quarter fiscal 2019 (ended Jan 31, 2019). The quarter’s earnings lagged the Zacks Consensus Estimate by 7.8%. This poor performance came in after the company delivered negative earnings surprise of 1.75% in the previous quarter.
For fiscal 2019 (ending July 2019), Donaldson expects earnings to be $2.27-$2.41, down from $2.31-$2.45 mentioned earlier.
Further, earnings estimates for the company have been lowered in the past 60 days. Currently, the Zacks Consensus Estimate for earnings is pegged at $2.33 for fiscal 2019 and $2.54 for fiscal 2020, reflecting declines of 2.5% and 2.3% from the respective 60-day-ago tallies.
Donaldson Company, Inc. Price and Consensus
Donaldson Company, Inc. Price and Consensus | Donaldson Company, Inc. Quote
Top-Line Weakness: In the fiscal second quarter, Donaldson’s revenues lagged the Zacks Consensus Estimate by 1.9%. Forex woes adversely influenced sales by 2.7%.
Though the company is hopeful of sound performance, it believes that forex woes, and uncertainties related to global politics and trade will adversely influence results. It projects sales growth of 5-9% in the year. This projection is down 2 percentage points from the previously stated range.
Growth projections for the segments were also revised down. Engine sales are now likely to grow 6-10%, down 1 percentage point from the previous forecast, and Industrial sales will increase 4-8%, down roughly 3% from the previously mentioned range. Within the Industrial segment, weakening Gas Turbine Systems (GTS) is concerning. Its sales are predicted to decline in a high-single digit in fiscal 2019.
Higher Costs and Expenses: Donaldson’s cost of sales increased 7.3% in the second quarter of fiscal 2019 and grew 10.1% in the first quarter. Price inflation in some major raw materials as well as high freight expenses have been escalating costs lately. For fiscal 2019, the company believes that inflation in material prices and high freight costs will lower gross profit by $30 million.
Long-Term Debt: Donaldson’s long-term debt in the last five fiscal years (2014-2018) increased 15.4% (CAGR). The metric stood at $632.5 million at the end of the second quarter of fiscal 2019. We believe that further issuances of debt instruments are bound to increase the balance and if unchecked, will increase the company’s financial obligations and prove detrimental to profitability.
Interest expenses in the fiscal second quarter were $5.3 million, higher than $5.1 million incurred in the year-ago quarter. For fiscal 2019, the company predicts interest expenses of $21 million.
Forex Woes: Geographical diversification is reflective of a flourishing business of Donaldson. However, this diversity exposed the company to headwinds arising from geopolitical issues and unfavorable movements in foreign currencies. In second-quarter fiscal 2019, forex woes adversely impacted sales by 2.7%.
The company believes that forex issues will persist in fiscal 2019, adversely impacting top-line results by 3% (versus 2% mentioned earlier).
Stocks to Consider
Some better-ranked stocks in the Zacks Industrial Products sector are DXP Enterprises, Inc. (NASDAQ:) , Sun Hydraulics Corporation (NASDAQ:) and Roper Technologies, Inc. (NYSE:) . While DXP Enterprises and Sun Hydraulics currently sport a Zacks Rank #1 (Strong Buy), Roper carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
In the past 60 days, earnings estimates for all these three stocks have improved for the current year. Further, average earnings surprise for the last four quarters was a positive 46.55% for DXP Enterprises, 2.27% for Sun Hydraulics and 4.96% for Roper.
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