Donaldson (DCI) Q2 Earnings Miss Estimates, Revenues Up Y/Y

Donaldson Company, Inc. (NYSE:DCI) posted adjusted earnings of 43 cents per share in second-quarter fiscal 2018, missing the Zacks Consensus Estimate by a penny.

However, the reported figure fared better than the prior-year quarter tally of 35 cents, reflecting an increase of 22.9%. The bottom line was driven by impressive growth in revenues as well as favorable market conditions.

Inside the Headlines

Donaldson’s total sales came in at $664.7 million, reflecting an improvement of 20.7% on a year-over-year basis. The top line also came ahead of the Zacks Consensus Estimate of $629.6 million. In fact, solid performance at the company’s Engine Products and Industrial Products segments led to the increase in sales. Notably, the year-over-year improvement in sales includes a benefit of about 4.6% and 1.5% from currency translation and acquisitions, respectively.

The Engine Products segment’s sales were up 22.2% year over year to $442.4 million. All the four sub-segments under Engine Products — Off-Road, On Road, Aftermarket as well as Aerospace and Defense — recorded an increase in sales, thus leading to the company’s overall strong performance. Sales in Aftermarket, On-road, Off-Road and Aerospace and Defense business increased by 18.3%, 50.6%, 37% and 2%, respectively.

Sales at the Industrial Product segment were up 17.7% year over year to $222.3 million. In the Industrial Filtration Solutions, Gas Turbine Systems and Special Applications business the metric improved 13.4%, 55.7% and 11.3%, respectively.

Donaldson Company, Inc. Price, Consensus and EPS Surprise

Donaldson Company, Inc. Price, Consensus and EPS Surprise | Donaldson Company, Inc. Quote

However, Donaldson’s adjusted operating margin contracted 30 basis points (bps) year over year to 12.3%. Meanwhile, the company’s earnings before interest, taxes, depreciation and amortization (EBITDA) were $100.5 million compared with $89.5 million recorded a year ago.

Liquidity & Cash Flow

As of Jan 31, 2018, Donaldson had cash and equivalents of $362.2 million compared with $308.4 million as on Jul 31, 2017. The company had long-term debt of $667.7 million as on Jan 31, 2018 compared with $537.3 million as on Jul 31, 2017.

Share Repurchase Program

In the fiscal second quarter, the company returned $23.4 million to shareholders through share dividends. Additionally, Donaldson repurchased shares worth $20.2 million, which represents 0.3% of its outstanding shares.

2018 Guidance

Concurrent with the earnings release, the company issued guidance for fiscal 2018. Donaldson currently expects fiscal 2018 GAAP earnings in the range of $1.93-$2.01 per share compared with its earlier projection of $1.90 to $2.04. Based on the current market scenario, the company expects a 13-15% increase in full-year sales year over year.

Segment-wise, Donaldson projects Engine Products sales to increase in the range of 17-19% compared with its earlier projection of 13-17%. Markedly, sales increase in Aftermarket, Off-Road, On-Road as well as Aerospace and Defense is expected to act as a tailwind for growth in the Engine Products segment.

Donaldson anticipates Industrial Products sales to increase in the range of 5-7% compared with its earlier guidance of 4-8%, mirroring impressive performance from Industrial Filtration Solutions and Special Applications.

Conclusion

Donaldson’s Engine Products segment has been exhibiting great momentum backed by benefit from stabilization in market conditions. Overall favorable trends including effects of restocking, favorable commodity prices, decent rig counts and stable industrial production are expected to prove conductive to the company’s results in the upcoming quarters. Also, the company’s strategy of winning first-fit programs, aftermarket growth, constant geographic expansion and fostering innovative technology are likely to act as growth catalysts going ahead.

Meanwhile, this Zacks Rank #3 (Hold) company is continually making strategic investments in capacity expansion, customer engagement, customer engagements through e-commerce, technology portfolio, and strengthening infrastructure. It is also working on expanding distribution capacity in some locations such as European distribution center, which is anticipated to provide cost benefits.

However, Donaldson remains vulnerable to uncertainty related to policy changes, global economic conditions and adverse currency fluctuations as more than half of its revenues comes from outside the United States.

Stocks to Consider

A few better-ranked stocks in the same space are Applied Industrial Technologies, Inc. (NYSE:AIT) , Avery Dennison Corporation (NYSE:AVY) and Brady Corporation (NYSE:BRC) . While Applied Industrial Technologies sports a Zacks Rank #1 (Strong Buy), Avery Dennison and Brady Corporation carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Applied Industrial Technologies has an impressive earnings surprise history, surpassing estimates in each of the trailing four quarters, with an average beat of 11%.

Avery Dennison has an excellent earnings surprise history, exceeding estimates in each of the trailing four quarters, with an average beat of 6.8%.

Brady Corporation has posted an earnings beat thrice in the trailing four quarters, with an average positive surprise of 3.9%.

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