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Donaldson Holds Investor Day 2019, Provides Long-Term Goals

Zacks Equity Research

Donaldson Company, Inc. DCI has hosted Investors Day 2019 on Apr 9. This pollution control company discussed priorities, capital-allocation policy and long-term growth targets.

It noted that its technological expertise, geographically diversified businesses, and growth opportunities in markets served will be advantageous in the years ahead. In addition, an experienced management team, policy of rewarding shareholders handsomely, and solid production and distribution capabilities will be boons.

Notably, the company invested more than $165 million between fiscal 2017 (ended July 2017) and fiscal 2018 (ended July 2018) for enhancing technological, distribution, connectivity and e-commerce capabilities. Over the long term, research and development investments are likely to be 3-4% of sales. It plans to invest $15 million for Bloomington, MN-based state-of-the-art facility.

Donaldson also stressed on the fact that fuel filtration has solid growth opportunities and can be a major driver for market share gain. The filtration products market is predicted to be worth $65 million.

Long-Term Financial Targets

Between fiscal 2019 (ending July 2019) and fiscal 2021 (ending July 2021), the company anticipates gaining from solid segmental performances, gross margin improvements and focused investments.

Sales are predicted to be $3-$3.3 billion in fiscal 2021, reflecting 3-7% compounded annual growth from the fiscal 2018 level. For the segments, sales will be $2-$2.2 billion for Engine Products, representing growth of 2-6% (CAGR), and roughly $1-$1.1 billion for Industrial Products, representing growth of 4-8% (CAGR).

Operating margin is likely to improve 120-200 basis points (bps) to 15-15.8% while incremental margin is expected to be 22-28% in fiscal 2021. For Engine Products, operating margins are predicted to improve 90-170 bps to 14.8-15.6% while that for Industrial Products will likely grow 180-260 bps to 17-17.8%.

Also, the company noted that the focus on costs, capacity and capability will lower costs in excess of $100 million, and improve inventory turns by 5-10%. Further, per the capital-allocation strategy, it will continue making capital expenditure, dividend payments, share buybacks, and mergers & acquisitions.

Zacks Rank & Stocks to Consider

With a market capitalization of $6.7 billion, Donaldson currently carries a Zacks Rank #3 (Hold). The company is poised to gain from segmental growth opportunities, capital investments and innovation programs. However, high raw material costs and weakening Gas Turbine Systems business remain concerning.
 
In the past six months, the company’s shares have declined 2.2% compared with the industry’s growth of 0.6%.




Moreover, earnings estimates for the company have been decreased, reflecting concerns over its growth prospects. In the past 60 days, the Zacks Consensus Estimate for the company’s earnings decreased 2.5% to $2.33 for fiscal 2019 and 2.3% to $2.54 for fiscal 2020 (ending July 2020).

Donaldson Company, Inc. Price and Consensus

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

Some better-ranked stocks in the Zacks Industrial Products sector are DXP Enterprises, Inc. DXPE, Sun Hydraulics Corporation SNHY and Roper Technologies, Inc. ROP. All these stocks currently sport a Zacks Rank #1 (Strong 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 positive 46.55% for DXP Enterprises, 2.27% for Sun Hydraulics and 4.96% for Roper.

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