Donaldson Company, Inc. (NYSE:DCI) has been struggling with the headwinds that have marred its operational performance over the past few quarters. We expect that a continuous rise in operating expenses, among other factors, will hinder the company’s growth.
It’s not surprising that the stock has put up a dismal show in the recent times. In the past three months, Donaldson has lost 9.5%, almost in line with the industry’s decline of 9.4%.
Read on to find the major factors curbing the Zacks Rank #4 (Sell) company’s growth and why it may be prudent to avoid the stock at the moment.
Factors at Play
Rising cost of sales has been a major cause of concern for Donaldson over the past few quarters. Notably, the metric jumped 16.1% year over year in fiscal 2018 (ended July 2018). Also, it escalated 10.1% in first-quarter fiscal 2019 (ended October 2019). Price inflation in some major raw materials, increased freight expenses as well as higher pension settlement disbursement primarily led to the rise. Notably, Donaldson expects that continued material price inflation and soaring freight charges will hurt its gross profit by $30 million in fiscal 2019 (ending July 2019).
Also, on an Enterprise Value/EBITDA (TTM) basis, the company's shares look overvalued compared to the industry with respectively tallies of 11.9x and 9.1x for the past three-month period. This makes us cautious about the stock.
Moreover, weakening Gas Turbine Systems (GTS) business remains a major cause of concern for the company. Notably, revenues of the GTS business fell 3.1% year over year in the fiscal first quarter, primarily on account of decline in large turbine projects. As a matter of fact, GTS sales are predicted to dip in high single-digit in fiscal 2019.
Further, over the past couple of months, the Zacks Consensus Estimate for fiscal 2020 (ending July 2020) earnings moved south from $2.61 to $2.60 but remained stable for fiscal 2019.
Stocks to Consider
Some better-ranked stocks from the same industry are Heritage-Crystal Clean, Inc. (NASDAQ:HCCI) , Sharps Compliance Corp (NASDAQ:SMED) and Tetra Tech, Inc. (NASDAQ:TTEK) . All these companies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Heritage-Crystal Clean’s earnings surprise in the last reported quarter was 8.00%.
Sharps Compliance’s pulled off an average earnings surprise of 66.67% in the last reported quarter.
Tetra Tech’s earnings surprise in the last reported quarter was 12.90%.
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