Donaldson Company, Inc. (NYSE:) seems to have lost its sheen, thanks to tough operating environment, a highly leveraged balance sheet, high cost of sales and forex woes.
The manufacturer of filtration systems and replacement parts currently carries a Zacks Rank #5 (Strong Sell). The company belongs to the Zacks Pollution Control industry.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
It is worth noting that Donaldson delivered weaker-than-expected results for the first three quarters of fiscal 2019 while it recorded positive earnings beat of just 1.67% in the fourth quarter (ended July 2019). The company’s average earnings surprise for the last four quarters was negative 3.59%.
A glance at Donaldson’s price trend in the past year shows that it has lost nearly 4.6% against the industry’s and S&P 500’s growth of 10.4% and 5.3%, respectively.
The company’s earnings estimates were lowered, reflecting bearish sentiments. Over the past 60 days, the Zacks Consensus Estimate for Donaldson’s earnings has declined 5.4% to $2.28 for fiscal 2020 (ending July 2020) and 4.5% to $2.53 for fiscal 2021 (ending July 2021).
Donaldson Company, Inc. Price and Consensus
Donaldson Company, Inc. price-consensus-chart | Donaldson Company, Inc. Quote
Factors Hurting the Stock’s Performance
Top-Line Weakness: Donaldson is concerned about tough operating conditions in the near term. It believes that the Engine Products segment will suffer from weakness in the first-fit on-road and off-road businesses. The segment’s sales growth will likely be (4%)-2% in fiscal 2020, whereas it reported 4.2% growth in fiscal 2019 (ended July 2019). Also, the company believes that weakness in the disk drive business will impact the Industrial Products segment’s special applications business.
For fiscal 2020, Donaldson predicts a low to mid-single-digit decline in global equipment production. The company’s sales growth will likely be (2%)-4%, whereas it recorded growth of 4% in fiscal 2019.
Cost-Related Woes: Donaldson is exposed to headwinds arising from undue rise in the cost of sales due to higher raw material and supply-chain costs. The company recorded 2.4% increase in cost of sales in fourth-quarter fiscal 2019. Notably, the quarter’s adjusted gross margin and operating margin contracted 140 basis points (bps) and 50 bps, respectively.
In the last five fiscal years (2015-2019), the company’s cost of sales rose 3.9% (CAGR).
Headwinds Related to International Operations: Donaldson has operations in Latin America; the United States; Europe, Middle East and Africa (EMEA); and the Asia Pacific. We believe that geographical diversification exposed it to headwinds arising from geopolitical issues, macroeconomic challenges and unfavorable movements in foreign currencies.
Notably, forex woes hurt the company’s sales by 2% in fourth-quarter fiscal 2019 while a similar impact of 1-2% is predicted for fiscal 2020.
Rising Debts: Donaldson’s increasing debt levels can be concerning. High debts are usually accompanied by financial obligations and it might adversely impact profitability.
The company’s long-term debt rose 8.5% (CAGR) in the last five fiscal years (2015-2019). Exiting fourth-quarter fiscal 2019, its long-term debt was approximately $584.4 million, reflecting 17% increase from the fiscal 2018 level.
Also, it is worth mentioning here that the company is more leveraged than the industry, with respective long-term debt-to-capital ratios of 40% and 38.3%.
Donaldson’s Performance Versus Three Industry Peers
The company underperformed its three industry peers — Casella Waste Systems, Inc (NASDAQ:) , Sharps Compliance Corp. (NASDAQ:) and Advanced Emissions Solutions, Inc (NASDAQ:) . In the past year, shares of Casella Waste, Sharps Compliance and Advanced Emissions have gained 52.2%, 28.2% and 23.8%, respectively.
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